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g r o w i n g
our core business
e x p a n D i n g
globally
ic buS
powered by MaxxForce
MN25
powered by
MaxxForce
Navistar International Corporation
4201 Winfield Road
Warrenville, IL 60555
www.navistar.com
teRRAStAR
powered by
MaxxForce
pRoStAR
powered by
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Our three-pillar strategy
Great
Products
Competitive
Cost
Structure
+
Profitable
Growth
+
net sales and revenues
In millions of dollars
net income attributable to navistar
international corporation In millions
diluted earnings (loss) Per share
Manufacturing segment Profit
In millions of dollars (unaudited)4
$15,000
$12,000
$9,000
$6,000
$3,000
$0
$300
$200
$100
$0
$(100)
$(200)
$4.50
$3.00
$1.50
$0
$(1.50)
$(3.00)
$900
$720
$540
$360
$180
$0
07
08
09
10
07
08
09
10
07
08
09
10
07
08
09
10
financial summary
In millions of dollars (except per share data)
2007
20081
20092
20103
net sales and revenues
$12,295
net income (loss) attributable to navistar international corporation $(120)
diluted earnings (loss) Per share
Manufacturing segment Profit (Unaudited & non-gaaP)4
$(1.70)
$462
$14,724
$134
$1.82
$ 693
$11,569
$12,145
$320
$4.46
$836
$223
$3.05
$741
1Excluding impairment of property and equipment and related charges of $395 million and the related tax expense of $1 million, fiscal 2008 net income would have totaled
$528 million, or $7.21 of diluted earnings per share.
2 Excluding the Ford settlement of $160 million and the related tax expense of $3 million, impairment of property and equipment of $31 million related to the idling of
manufacturing facilities, and an $11 million write-off of debt issuance costs related to the company’s refinancing, fiscal 2009 net income would have totaled $205 million,
or $2.86 of diluted earnings per share.
3Includes benefit of $27 million related to Ford settlement.
4The manufacturing segment collectively represents the company’s truck, engine and parts segments.
stock Performance
$250
$200
$150
$100
$50
2006
2007
2008
2009
2010
Navistar
S&P 500
100.76
228.92
109.45
120.42
175.07
116.34
133.28
85.17
93.52
108.97
S&P Construction & Farm
127.09
186.91
90.16
124.72
197.56
E
Printed on recycled paper
c o nTr o l li n g o u r D e sT i ny a n D le ve r ag i n g o u r as s e Ts
2010 Annual Report to Shareholders
06
07
08
09
10
– Navistar – S&P 500 – S&P 500 Construction & Farm Machinery & Heavy Trucks Index
This graph shows the yearly percentage change in the cumulative total shareowner return on Navistar Common Stock during the last five fiscal years ended October 31. The graph also shows the cumulative
total returns of the S&P 500 Index and the S&P Construction & Farm Index. The comparison assumes $100 was invested on October 31, 2005, in Navistar Common Stock and in each of the indices shown
and assumes reinvestment of dividends. Source: Standard & Poor’s Compustat
Expanding Product Lineup Leverages Our Assets, Positions Us for Growth
2007
2011
Common Platform
Common Platform
Global Powertrain
WorkStar
DuraStar
9900
DuraStar
ProStar+
Vesta
MN25
4.8L
7.2L
School Bus
TranStar
9200/9400
Engines
7
Purchased Engines
WorkStar
LoneStar
Continental Mixer
9900
School Bus
TranStar
eStar
ATX-6
9.3L
7
DT & 10
11 & 13
15
DT & 10
MaxxPro
MXT
9200/9400
Cummins ISX
CAT C15
7000 Series
TerraStar
PayStar
7000-MV
AC Bus
DuraStar Hybrid
Michael N. Hammes
Lead Director, Retired Chairman and Chief
Executive Officer of Sunrise Medical Inc.,
a designer, manufacturer and marketer
of home medical equipment worldwide
Committees: 1, 2, 3 (Chair), 4 (Chair)
William H. Osborne
Former President & CEO of Federal
Signal Corporation, a manufacturer and
marketer of fire, safety and municipal
infrastructure equipment
Committee: 4
David D. Harrison
Retired Executive Vice President and
Chief Financial Officer of Pentair, Inc.,
a global manufacturing company
Committees: 2, 5
James H. Keyes
Retired Chairman of the Board of
Johnson Controls, Inc., an automotive
system and facility management and
control company
Committees: 1, 2, 3, 5 (Chair)
Steven J. Klinger
President and Chief Operating Officer
of Smurfit-Stone Container Corporation,
a global paperboard and paper-based
packaging company
Committees: 2, 5
SEC Filings
Filings with the U.S. Securities and
Exchange Commission, including
the latest 10-K and proxy statement,
are available on our Website at
http://ir.navistar.com/
Transfer Agent
For inquiries regarding name changes,
changes of address or missing
certificates, please contact our
shareholder service provider:
BNY Mellon Shareowner Services
P.O. Box 3315
South Hackensack, NJ 07606-1915
480 Washington Blvd.
Jersey City, NJ 07310
Telephone: (888) 884-9359
Dennis D. Williams
Secretary, Treasurer and Director of Agricultural
Implement and Transnational Departments,
United Auto Workers, an international union
Committee: 4
COMMITTEES:
1. Executive
2. Compensation
3. Nominating and Governance
4. Finance
5. Audit
Stock Trading Information
Navistar International Corporation is
listed on the New York Stock Exchange.
Ticker Symbol: NAV
Independent Auditor
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
Corporate Headquarters
Navistar International Corporation
4201 Winfield Road
Warrenville, IL 60555
Telephone: (630) 753-5000
Board of directors
Daniel C. Ustian
Chairman, President and Chief
Executive Officer of Navistar
International Corporation
Committee: 1
Eugenio Clariond
Retired Chairman and Chief Executive
Officer of Group IMSA, S.A., a producer
of steel, plastic, aluminum and other
related products
Committees: 3, 4
John D. Correnti
Chairman and Chief Executive Officer of
Steel Development Company, LLC, a steel
mill operational and development company
Committees: 2 (Chair), 3, 5
Diane H. Gulyas
President of Performance Polymers, which
contains three business units—engineering
polymers, elastomers and films—E.I. duPont
de Nemours & Company, a science-
based products and services company
Committee: 4
shareholder inforMation
Annual Meeting
The annual meeting of shareholders
will be held at 11:00 a.m. Central time
Tuesday, February 15, 2011, at:
Hilton Chicago
720 South Michigan Avenue
Chicago, IL 60603
USA
Investor Relations
For information about shareholder
matters, please contact the investor
relations team:
Website: http://ir.navistar.com/
Telephone: (630) 753-2143
Email: investor.relations@navistar.com
reg g gaaP reconciliation
($ Millions except per share data)
Manufacturing segment profit* (excluding items listed below)
Ford settlement net of related charges
Impairment of property, plant and equipment
Manufacturing segment Profit*
Corporate items (excluding items listed below)
Write-off debt issuance cost
total corporate items
Interest Expense, Corporate
Financial Services profit (loss)
subtotal–below the line
income (loss) excluding income tax
Income tax expense
FY 2007
FY 2008
FY 2009
FY 2010
$462
-
-
462
(435)
(31)
(466)
(196)
127
(535)
(73)
(47)
(120)
(1.27)
-
-
(0.43)
(1.70)
70.3
$1,088
(37)
(358)
693
(322)
-
(322)
(156)
(24)
(502)
191
(57)
134
7.21
(0.50)
(4.89)
-
1.82
73.2
$707
160
(31)
836
(418)
(11)
(429)
(90)
40
(479)
357
(37)
320
2.86
2.19
(0.43)
(0.16)
4.46
71.8
$741
-
-
741
(450)
-
(450)
(140)
95
(495)
246
(23)
223
3.05
-
-
-
3.05
73.2
net income (loss) attributable to navistar international corporation
Diluted earnings per share attributable to Navistar International Corporation (excluding items listed below)
Ford settlement net of related charges
Impairment of property, plant and equipment
Write-off debt issuance cost
diluted earnings (loss) per share ($’s) attributable to navistar international corporation
Weighted average shares outstanding: diluted (millions)
* Includes: non-controlling interest in net income of subsidiaries net of tax; extraordinary gain net of tax
The financial measures presented above are unaudited non-GAAP. This is not in accordance with, or an alternative for, U.S. generally accepted accounting principles (GAAP). The non-GAAP financial information presented herein 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, giving effect to the adjustments shown in the reconciliation above, 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 of our operating
segments. We have chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of operating results, to illustrate the results of operations giving effect to the non-GAAP
adjustments shown in the above reconciliations, and to provide an additional measure of performance.
forward-looking stateMents
Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), Section 21E of the Securities
Exchange Act of 1934, as amended (“Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements only speak as of the date of this report and the Company assumes no obligation to update the information
included in this report. Such forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. 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. For a further description of these factors, see Item 1A. Risk Factors of our
Form 10-K for the fiscal year ended October 31, 2009, which was filed on December 21, 2009. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial
results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. 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 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.
Expanding Product Lineup Leverages Our Assets, Positions Us for Growth
2007
2011
Common Platform
Common Platform
Global Powertrain
WorkStar
DuraStar
9900
DuraStar
ProStar+
Vesta
MN25
4.8L
7.2L
School Bus
TranStar
9200/9400
Engines
7
Purchased Engines
WorkStar
LoneStar
Continental Mixer
9900
School Bus
TranStar
eStar
ATX-6
9.3L
7
DT & 10
11 & 13
15
DT & 10
MaxxPro
MXT
9200/9400
Cummins ISX
CAT C15
7000 Series
TerraStar
PayStar
7000-MV
AC Bus
DuraStar Hybrid
Michael N. Hammes
Lead Director, Retired Chairman and Chief
Executive Officer of Sunrise Medical Inc.,
a designer, manufacturer and marketer
of home medical equipment worldwide
Committees: 1, 2, 3 (Chair), 4 (Chair)
William H. Osborne
Former President & CEO of Federal
Signal Corporation, a manufacturer and
marketer of fire, safety and municipal
infrastructure equipment
Committee: 4
David D. Harrison
Retired Executive Vice President and
Chief Financial Officer of Pentair, Inc.,
a global manufacturing company
Committees: 2, 5
James H. Keyes
Retired Chairman of the Board of
Johnson Controls, Inc., an automotive
system and facility management and
control company
Committees: 1, 2, 3, 5 (Chair)
Steven J. Klinger
President and Chief Operating Officer
of Smurfit-Stone Container Corporation,
a global paperboard and paper-based
packaging company
Committees: 2, 5
SEC Filings
Filings with the U.S. Securities and
Exchange Commission, including
the latest 10-K and proxy statement,
are available on our Website at
http://ir.navistar.com/
Transfer Agent
For inquiries regarding name changes,
changes of address or missing
certificates, please contact our
shareholder service provider:
BNY Mellon Shareowner Services
P.O. Box 3315
South Hackensack, NJ 07606-1915
480 Washington Blvd.
Jersey City, NJ 07310
Telephone: (888) 884-9359
Dennis D. Williams
Secretary, Treasurer and Director of Agricultural
Implement and Transnational Departments,
United Auto Workers, an international union
Committee: 4
COMMITTEES:
1. Executive
2. Compensation
3. Nominating and Governance
4. Finance
5. Audit
Stock Trading Information
Navistar International Corporation is
listed on the New York Stock Exchange.
Ticker Symbol: NAV
Independent Auditor
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
Corporate Headquarters
Navistar International Corporation
4201 Winfield Road
Warrenville, IL 60555
Telephone: (630) 753-5000
Board of directors
Daniel C. Ustian
Chairman, President and Chief
Executive Officer of Navistar
International Corporation
Committee: 1
Eugenio Clariond
Retired Chairman and Chief Executive
Officer of Group IMSA, S.A., a producer
of steel, plastic, aluminum and other
related products
Committees: 3, 4
John D. Correnti
Chairman and Chief Executive Officer of
Steel Development Company, LLC, a steel
mill operational and development company
Committees: 2 (Chair), 3, 5
Diane H. Gulyas
President of Performance Polymers, which
contains three business units—engineering
polymers, elastomers and films—E.I. duPont
de Nemours & Company, a science-
based products and services company
Committee: 4
shareholder inforMation
Annual Meeting
The annual meeting of shareholders
will be held at 11:00 a.m. Central time
Tuesday, February 15, 2011, at:
Hilton Chicago
720 South Michigan Avenue
Chicago, IL 60603
USA
Investor Relations
For information about shareholder
matters, please contact the investor
relations team:
Website: http://ir.navistar.com/
Telephone: (630) 753-2143
Email: investor.relations@navistar.com
reg g gaaP reconciliation
($ Millions except per share data)
Manufacturing segment profit* (excluding items listed below)
Ford settlement net of related charges
Impairment of property, plant and equipment
Manufacturing segment Profit*
Corporate items (excluding items listed below)
Write-off debt issuance cost
total corporate items
Interest Expense, Corporate
Financial Services profit (loss)
subtotal–below the line
income (loss) excluding income tax
Income tax expense
FY 2007
FY 2008
FY 2009
FY 2010
$462
-
-
462
(435)
(31)
(466)
(196)
127
(535)
(73)
(47)
(120)
(1.27)
-
-
(0.43)
(1.70)
70.3
$1,088
(37)
(358)
693
(322)
-
(322)
(156)
(24)
(502)
191
(57)
134
7.21
(0.50)
(4.89)
-
1.82
73.2
$707
160
(31)
836
(418)
(11)
(429)
(90)
40
(479)
357
(37)
320
2.86
2.19
(0.43)
(0.16)
4.46
71.8
$741
-
-
741
(450)
-
(450)
(140)
95
(495)
246
(23)
223
3.05
-
-
-
3.05
73.2
net income (loss) attributable to navistar international corporation
Diluted earnings per share attributable to Navistar International Corporation (excluding items listed below)
Ford settlement net of related charges
Impairment of property, plant and equipment
Write-off debt issuance cost
diluted earnings (loss) per share ($’s) attributable to navistar international corporation
Weighted average shares outstanding: diluted (millions)
* Includes: non-controlling interest in net income of subsidiaries net of tax; extraordinary gain net of tax
The financial measures presented above are unaudited non-GAAP. This is not in accordance with, or an alternative for, U.S. generally accepted accounting principles (GAAP). The non-GAAP financial information presented herein 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, giving effect to the adjustments shown in the reconciliation above, 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 of our operating
segments. We have chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of operating results, to illustrate the results of operations giving effect to the non-GAAP
adjustments shown in the above reconciliations, and to provide an additional measure of performance.
forward-looking stateMents
Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), Section 21E of the Securities
Exchange Act of 1934, as amended (“Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements only speak as of the date of this report and the Company assumes no obligation to update the information
included in this report. Such forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. 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. For a further description of these factors, see Item 1A. Risk Factors of our
Form 10-K for the fiscal year ended October 31, 2009, which was filed on December 21, 2009. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial
results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. 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 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.
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G R O W I N G
our core business
E X P A N D I N G
globally
IC BUS
powered by MaxxForce
MN25
powered by
MaxxForce
Navistar International Corporation
4201 Winfi eld Road
Warrenville, IL 60555
www.navistar.com
TERRASTAR
powered by
MaxxForce
PROSTAR
powered by
MaxxForce
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Our three-pillar strategy
Great
Products
Competitive
Cost
Structure
+
Profi table
Growth
+
Net Sales and Revenues
In millions of dollars
Net Income Attributable to Navistar
International Corporation In millions
Diluted Earnings (Loss) Per Share
Manufacturing Segment Profi t
In millions of dollars (unaudited)4
$15,000
$12,000
$9,000
$6,000
$3,000
$0
$300
$200
$100
$0
$(100)
$(200)
$4.50
$3.00
$1.50
$0
$(1.50)
$(3.00)
$900
$720
$540
$360
$180
$0
07
08
09
10
07
08
09
10
07
08
09
10
07
08
09
10
Financial Summary
In millions of dollars (except per share data)
2007
20081
20092
Net Sales and Revenues
$12,295
Net Income (Loss) Attributable to Navistar International Corporation $(120)
Diluted Earnings (Loss) Per Share
Manufacturing Segment Profi t (Unaudited & Non-GAAP)4
$(1.70)
$462
$14,724
$134
$1.82
$ 693
$11,569
$320
$4.46
$836
20103
$12,145
$223
$3.05
$741
1Excluding impairment of property and equipment and related charges of $395 million and the related tax expense of $1 million, fi scal 2008 net income would have totaled
$528 million, or $7.21 of diluted earnings per share.
2 Excluding the Ford settlement of $160 million and the related tax expense of $3 million, impairment of property and equipment of $31 million related to the idling of
manufacturing facilities, and an $11 million write-off of debt issuance costs related to the company’s refi nancing, fi scal 2009 net income would have totaled $205 million,
or $2.86 of diluted earnings per share.
3Includes benefi t of $27 million related to Ford settlement.
4The manufacturing segment collectively represents the company’s truck, engine and parts segments.
Stock Performance
$250
$200
$150
$100
$50
2006
2007
2008
2009
2010
Navistar
S&P 500
100.76
228.92
109.45
120.42
175.07
116.34
133.28
85.17
93.52
108.97
S&P Construction & Farm
127.09
186.91
90.16
124.72
197.56
E
Printed on recycled paper
C O NTR O LLI N G O U R D E ST I NY A N D LE VE R AG I N G O U R AS S E TS
2010 Annual Report to Shareholders
06
07
08
09
10
– Navistar – S&P 500 – S&P 500 Construction & Farm Machinery & Heavy Trucks Index
This graph shows the yearly percentage change in the cumulative total shareowner return on Navistar Common Stock during the last fi ve fi scal years ended October 31. The graph also shows the cumulative
total returns of the S&P 500 Index and the S&P Construction & Farm Index. The comparison assumes $100 was invested on October 31, 2005, in Navistar Common Stock and in each of the indices shown
and assumes reinvestment of dividends. Source: Standard & Poor’s Compustat
RRD4759_Cov.indd 1
RRD4759_Cov.indd 1
12/30/10 11:02 AM
12/30/10 11:02 AM
G R O W I N G O U R C O R E B U S I N E S S
My Fellow Shareholders:
A few years back, Navistar embarked on a strategy that dealt with
two conditions the company has faced for many years:
1 The inherent cyclicality of the North American trucking industry.
2 Post-retirement costs related to the shrinking of the corporation
from a peak of more than 100,000 employees to around 15,800.
20
10
ACHIEVEMENTS
The company outlined a plan for growth that would result in profi tability
at all points in the cycle, containment of post-retirement costs, and peak
profi ts during good economic times.
This growth plan is centered around three pillars: Great products, competitive
cost structure and profi table growth. Growth is enabled by leading products,
and costs are improved as a result of scale and effi ciencies created by the
growth. And to assure good shareholder returns on capital, the strategy must
best utilize the resources available.
The company describes this as “leveraging assets that the company has, as
well as what others have built.” Important to this strategy is differentiating our
company from our competitors, providing a distinction for customers and
profi tability and growth for shareholders.
The economic challenges over the last three years have certainly tested this
strategy. With the North American market at its lowest point in 50 years, the
company was still able to provide good profi ts of more than $3 a share, while
investing in future growth in the core business as well as new areas. As you can
see, the chart below depicts a comparison of industry volumes and profi ts during
recent tough economic times. We not only improved our profi tability, but at the
same time, also continued to invest.
Growing Revenues and Earnings in the Worst Truck Market in 50 Years
$(4.86)
$4.12
$1.90
$(0.64)
$(1.70)
$7.21*
$2.86*
$3.05
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400,000
350,000
350,000
,
300,000
250,000
250,000
200,000
200,000
150,000
150,000
100,000
100,000
,
50,000
03
04
05
06
07
08
09
10
Industry Units
Adjusted EPS
* Presented on a non-GAAP basis. See Reg G GAAP Reconciliation
for reconciliation to GAAP fi nancial presentation.
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Bod.indd 1
Bod.indd
12/2/29/10 5:43 PMPM
12/29/10 5:43 PM
g R o w i n g o u R c o R e b u s i n e s s
continued investment in Great Products
Positions navistar for the Future
At the forefront of this improvement are great products, and our current product lineup
is growing versus that of only three years ago. So while the company’s earnings were
strong, the positioning for the future is even better.
In each market, we are indeed a leader. Furthermore, our core parts business has
grown along with this vehicle share.
Of significance is the 9-point gain over the last three years in Class 8 vehicles,
which is the largest sector in the North American commercial truck industry.
Our differentiated products are a key reason for this gain, including the International®
ProStar®+. This heavy-duty, long-haul vehicle builds on the success of the market-
leading ProStar, but is 700 pounds lighter than its predecessor, with enhanced
aerodynamics and powertrain features that improve fuel economy.
#2
24%
heavy truck
9-point gain
in market share
in three years
Navistar
2010 Market
Share
#1
59%
#1
33%
school Bus
severe service truck
#1
38%
medium truck
2 | nAvi stAr 2010 An n u Al R e poRt
Navistar Flexible Manufacturing Strategy Reduces Costs
e x pA n d i n g g lo b A l lY
Competitive
Cost
Structure
Ontario, Canada
Springfield, Ohio
Melrose Park, Ill.
Conway, Ark.
Tulsa, Okla.
Huntsville, Ala.
Garland, Texas
Escobedo, Mexico
$200 Million Saved
since 2008
Flexible manufacturing: every
Plant can make every Product
the second pillar is having a competitive cost
structure. As the company grows, the ability to have
scale for our own production as well as our suppliers is
paramount. our market successes have enabled us to
bring sustainable advantages to supplier partners.
our manufacturing strategy took its shape in 2008.
that strategy started with efficiencies inside each
operation. it progressed in 2009 by having each
manufacturing plant be capable of assembly of several
different engine or truck models. this year, we took
additional steps:
+ with the successful conclusion of negotiations with
the united Auto workers (uAw), we have achieved a
flexible manufacturing approach. each of our current
truck assembly facilities now has the capability of
manufacturing nearly every model.
+ we deployed lean principles in our parts business,
sourcing components more efficiently. we also
deployed lean distribution techniques in our parts
facilities, which contributes to improved margins.
+ Meanwhile, our new world headquarters in lisle, ill.,
will allow us to consolidate our truck and engine
research and development activities
in the chicago area for improved efficiency.
our increased flexibility will enable us to build trucks
closer to the customer, better utilize capacity and
enhance customer service. improved proximity will also
reduce logistics costs, which have recently shown the
potential to add as much to the cost of vehicles as the
cost to manufacture them. our progress in implementing
this strategy has resulted in more than $200 million
manufacturing cost savings since 2008.
new customers, vehicle
variants support navistar
Defense’s mission
but the key to our long-term success is profitable
growth in areas we haven’t played in.
certainly our military business has been a great success
story. in only four years, we have built a sustainable
$1.5 billion to $2 billion business. consistent with our
strategy is that we have a complete lineup of wheeled
vehicles we originally created for commercial use. this
of course provides excellent return on capital, but also
enables us to compete well by being responsive to the
ever-changing conditions in combat today. our defense
offerings provide:
2010 An n uAl R e poRt nAvi stAr | 3
g R o w i n g o u R c o R e b u s i n e s s
Navistar
Defense
Expands
Offerings
miLcOts
tactical
cOts
+ A combination of unsurpassed quality with rapid
deployment and advanced technology. one key
technology differentiator is the dxM™ independent
suspension system.
+ increasing product diversification, including
an expanding number of programs that utilize
commercial trucks and commercial trucks with
military features.
+ A growing range of tactical, armored vehicles, such
as the international® Maxxpro® Mine Resistant
Ambush protected (MRAp) vehicles. Maxxpro
MRAp vehicles, which navistar originally supplied
exclusively for troop transport, are now being offered
in tractor, wrecker and recovery variants.
+ A growing sustainment and support business,
including parts support. As more and more of
our vehicles are in use by the military, parts will be
a major contributor to the sustainability of our
defense business.
3rd
Consecutive
Year with more
than $2 Billion in
Revenues
Major contract wins this year included:
+ Medium tactical vehicles (MtVs) for the u.s.
Army tank-automotive and Armaments command
(tAcoM) and for the israel Ministry of defense.
+ system technical support (sts) for international
Maxxpro MRAp vehicles.
+ international Mxt™ Husky vehicles for the
u.K. Ministry of defense.
+ international Maxxpro dash MRAp vehicles for the
u.s. Marine corps systems command. this includes
orders for the new Maxxpro Recovery variant as
well as dash vehicles incorporating the new dxM
independent suspension capability.
but most important of all is the fact that many of these
vehicles are helping to keep our troops safe while
they protect our country. in all, navistar defense has
so far served the u.s. and its allies through sales
to 26 countries. based on this record of product
diversification, an expanded customer base, and
enhanced customer support including our defense
parts business, it’s clear that navistar defense is well
positioned for the future.
Leveraging
TerraStar
Platform for
Unsurpassed
Value
4 | nAvi stAr 2010 An n u Al R e poRt
e x pA n d i n g g lo b A l lY
New RV,
Mixer Products
Take Full Advantage
of Acquisitions
Profitable
Growth
new, improved Product Lines
Pave Way for Future success
2010 was also a year of investing in products and
markets whose results are forthcoming. First are new
markets in the u.s.:
+ one important new opportunity is our expansion into
the class 4/5 truck market with the launch of the
international® terrastar™. it’s a powerful, rugged and
reliable work truck that leverages our medium-duty
leadership to address this growing segment.
+ based on the same class
4/5 platform we used in
the terrastar, our bus
business expanded into
the type A bus business,
launching the ic bus™ Ae
series school bus and Ac
series commercial small
shuttle bus. both vehicles,
like our entire line of bus products, take advantage
of our status as the only truly integrated provider in
the business. they combine industry-leading chassis,
body and engine expertise to deliver unsurpassed
durability, serviceability and value.
navistar Debuts Fuel-sipping,
Game-changing motorcoach
we also developed new niche products, in new
markets, that leverage off platforms we already have:
+ leveraging last year’s acquisition of Monaco RV,
llc, we launched the Monaco® Vesta RV. the
Vesta is the first fully integrated RV, with engine,
chassis and body developed in tandem. it is also
the most aerodynamic, ergonomic and fuel-efficient
motorcoach ever developed. the motor home of
the future, it uses enhanced aerodynamics and our
MaxxForce 7 V-8 engine to achieve a 100 percent
improvement in fuel economy.
+ building on last year’s acquisition of continental
Manufacturing, we also added continental’s line of
concrete mixers to navistar’s industry-leading lineup
of vocational, purpose-built products that employ an
integrated body solution.
these new products provide
best-in-class solutions
and position us well for
new opportunities as
the market recovers.
the Perfect
match: navistar’s
Breakthrough All-electric
vehicle, Urban Deliveries
we also expanded our drivetrain options for the future.
we’ve long been the leader in introducing diesel hybrid
vehicles. this year, we announced:
+ the estar™, our all-electric vehicle, which has
attracted interest from a range of major companies.
the estar is ideally suited for urban delivery vehicles
that require an effective range of less than 100 miles
per day.
2009 An n uAl R e poRt nAvi stAr | 5
g R o w i n g o u R c o R e b u s i n e s s
+ we are currently offering natural gas-powered
workstar® medium-duty vehicles and will be
releasing the same features in the durastar® model.
in addition, we are working with clean Air power ltd.
to develop a natural gas version of our MaxxForce
13 big bore engine and have already produced a
working concept validation vehicle.
these advances give us the fullest range of alternative-
fuel and emissions-friendly vehicles in the industry.
navistar expands
Global Footprint
on the global front, our south American engine
business continues to deliver returns on investments
we made over the past few years. this year, it produced
record numbers of engines and exported to 36
customers in 25 different countries, such as daewoo
bus in Korea. our north American engine business
overall is also expanding into new customer categories,
including terminal tractors, fire and emergency vehicles,
the marine segment and the generation set business.
to best leverage assets, we have also chosen great
partners to expand our global reach rapidly and cost-
effectively. in 2010, we introduced with our partner
Mahindra & Mahindra a full lineup of vehicles for the
rapidly growing india market:
+ Mahindra-navistar Automotives ltd. (MnAl), our
truck joint venture, launched production of its first
truck offering, the 25-ton capacity Mn25, at our
World-Class Trucks Shake Up
Indian Market
15 MNAL dealerships raise the bar
for sales and service in India
world-class plant in chakan,
pune, india. unlike the offerings
of other global competitors, the
Mn25 and other vehicles are
being designed from the ground up in india, meeting
local requirements while offering global performance
and value.
+ A network of 15 exclusive, state-of-the-art MnAl
dealerships has been established and is raising the
bar for sales and service in the indian market. the
“now network” established by the joint venture offers
comprehensive roadside, telephone
and online service to provide
6 | nAvi stAr 2010 An n u Al R e poRt
customers with unprecedented access to service
and support.
we are making inroads in the indian market by demon-
strating to customers that “oK is no longer oK,” now
that they can obtain local Mahindra navistar products
that are built to truly world-class standards.
we also embarked on a global partnership with
caterpillar inc., nc2 global llc, that utilizes
international truck product and experience and
caterpillar’s distribution network and global brand.
the new venture is making rapid progress:
+ it has established production capabilities in
Australia, brazil and south America and is
expanding distribution networks in those markets.
+ the first-ever caterpillar on-road vehicles are being
produced in Australia and are leveraging our truck
manufacturing expertise and caterpillar’s powerful
global network to create a new source of revenue
for both companies.
+ the venture’s global eagle cabover long-haul vehicle,
now in development, will serve as a platform for
additional global expansion in high-potential markets.
distribution and product are being developed for global
presence starting in 2011.
this fall, we also moved forward with two joint
e x pA n d i n g g lo b A l lY
ventures in china, which pending government approval
will move forward early in the new year. navistar and
Anhui Jianghuai Automobile co. (JAc) will develop
and market advanced diesel engines, while nc2 will
partner with JAc to develop and market advanced
commercial vehicles.
+ both ventures will leverage our truck expertise and
JAc’s knowledge of the chinese market to build new
medium-duty and heavy-duty truck products.
+ the ventures rapidly open the door to the chinese
commercial truck market—the largest in the world —
as we grow our business in the Asia pacific region.
through all these ventures, we are positioning ourselves
to bring unique value to key global truck markets, setting
ourselves up for both growth and global scale. And
we are doing this in a way that is not just more
cost-effective, but also more efficient, than could
be achieved on our own.
navistar’s r&D Delivers
market-Leading, customer-
Friendly emissions strategy
perhaps the biggest differentiator for us has been our
ability to meet the 2010 u.s. emissions standard with
no additional aftertreatment:
+ we are leading the industry with our customer-
friendly nox emissions solution, MaxxForce
2010 An n uAl R e poRt nAvi stAr | 7
g R o w i n g o u R c o R e b u s i n e s s
Profitable
Growth
South American Engine Business Exports
to 36 Customers in 25 Countries
Advanced egR, which
enables us to avoid the use
of liquid urea scR systems in
we are the only manufacturer that has this in-cylinder
answer, while also achieving best-in-class fuel economy
and unsurpassed engine life.
our epA-certified engines.
by taking responsibility for emissions compliance
in cylinder, we’re sparing customers from the cost
and inconvenience of maintaining a supply of liquid
urea. we’re also eliminating the added weight and
driver training required by our competitors’
scR systems.
+ And we demonstrated that it is
possible to achieve equal or better
fuel economy with our past engines,
while also achieving best-in-class
fluid economy—a measurement of the
cost of diesel fuel combined
with the cost of the liquid urea used by
our competitors—between 1 percent and
2.5 percent better than the competition.
8 | nAvi stAr 2010 An n u Al R e poRt
navistar takes charge of
Destiny with vertical integration,
customer Diversification
our emissions solution is just
one of our proprietary engine
technologies. by taking ownership
of air systems, fuel systems and
aftertreatment systems, we are
taking control of our destiny
and offering key technologies
designed to work perfectly
in sync. that means better
performance.
+ this year, our high-tech components subsidiary,
+ in the meantime, we have been successful in
e x pA n d i n g g lo b A l lY
pure power technologies, successfully launched
a next-generation fuel system for i-6 engines, while
also integrating a new egR valve and throttle
valve businesses as a key ingredient of our
emissions strategy.
+ we also began to diversify the customer base for our
engine components by securing an Asian customer
for our valve business.
Another way we’re taking control of our destiny is by
continuing to vertically integrate our truck business with
our engine business. For the first time, we are supplying
a full range of engines designed to fit every north
American truck application:
+ our full lineup of epA 2010-certified MaxxForce
engines enables us to optimize each vehicle’s
powertrain in order to meet customers’ requirements
in the most efficient way.
+ we are well on our way to delivering our MaxxForce
15-liter engine, which is currently being tested by a
wide array of customers.
demonstrating that for most heavy-duty applications,
our MaxxForce 13-liter engine provides excellent
power and torque, while surpassing competitive
engines in weight and fuel economy.
strong Dealer network Grows
even stronger
the market is recognizing our differentiation, our
customer-friendly product development strategy and
our expanding product lineup. our outstanding dealer
network, which is a major asset for navistar, grew even
stronger during the year:
+ we added several experienced dealership groups,
including dealers covering markets in southern
georgia, west Virginia, phoenix and tucson,
indianapolis, philadelphia, utah and idaho.
+ dealers see great opportunities in our improved
vertical integration, including our exclusive use of
MaxxForce engines in international trucks. this allows
dealers to support customers on engines, as well as
other parts and components, providing increased
revenue and profit opportunities for the distribution
channel. our dealers are supporting customers
in new ways by adding new diagnostic tools and
equipment, enhanced parts service and expanded
hours of operation.
+ our dealer value proposition is also strengthened by
our new oncommand™ bundled approach to service
and after-sales support offerings. oncommand
offers easy online and call-center access and
We Control
Our Destiny
with Our Own
High-Tech
Components
Controlling
Our Destiny
rillamcon ad tem del
dolobor senis adit adignit
nullaor iurerat ipissis adit
elit nos amcommy nulla
feuis eugait alit
2010 An n uAl R e poRt nAvi stAr | 8
g R o w i n g o u R c o R e b u s i n e s s
We
Offer a
Full Range of
Engines ... and
Strengthened
Financing
helps customers achieve more efficient repairs and
maintenance, better lifecycle value and an overall
lower cost of ownership.
Another crucial contributor to the success of our
dealer network was the navistar parts group, which
gained market share and continued its record of 16
years of uninterrupted revenue growth in the north
America commercial market by providing outstanding
support to our dealers and customers.
improved retail strategy
strengthens customer
Financing
our finance subsidiary, navistar Financial, improved its
profitability significantly this year, driven by substantial
reductions in borrowing costs and portfolio losses.
while navistar Financial’s performance improved, its
traditional methods of financing were less effective as
a result of the economy. navistar Financial was able
to maintain a sufficient level of funding for dealers and
customers, but it was clear that continuing to provide
an effective retail financing platform in the united
states would be a significant challenge.
we took action to enable us to control our destiny
and explored a variety of potential strategic solutions
to ensure strong, viable financing products for our
dealers and customers. navistar capital, an alliance
with ge capital, began providing retail financing
services in the u.s. earlier this year to support the sale
of navistar products.
10 | nAvi stAr 2010 An n u Al R e poRt
e
g
n
a
h
c
t
n
e
c
r
e
p
Y
o
Y
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
Great Products
Equal Great
Market Share
navistar u.s. net sales
total industry
2008 vs. 07
2010 vs. 09
2009 vs. 08
+ this solution leverages the capabilities of ge—
cost structure, product offerings and capacity—
and preserves the strategic value of navistar
Financial—dealer integration, wholesale financing
and brand equity.
+ over the next few years, navistar Financial will continue
to pay off debt and reduce leverage as its legacy retail
assets pay down, significantly strengthening the risk
profile for both navistar and navistar Financial.
+ this financing strategy frees up capital to invest in our
other core businesses.
e x pA n d i n g g lo b A l lY
Navistar Board of Directors James H. Keyes, Michael N. Hammes, Eugenio Clariond, David D. Harrison, John D. Correnti,
Steven J. Klinger, Daniel C. Ustian, William H. Osborne, Diane H. Gulyas and Dennis D. Williams.
Our new world headquarters in
Lisle, Ill., will consolidate R&D for
improved efficiency.
we’ve had a successful program with
ge capital in canada to provide retail
and wholesale financing for more than
20 years now, and we expect similar
success from this new alliance in the
united states. Meanwhile, navistar
Financial has more than $500 million
capacity to support additional dealer
inventory funding, positioning us well to
address growing market demand as the
economy recovers.
2011 and Beyond:
navistar’s strategies
map Out Future
success
the shaping of our strategy took place
over the last three years, but certainly
had strong results in this tough economy, while positioning
us for very strong results in the future:
+ in 2011, we will begin to see the full value of our 2010
emission strategy in our north American truck business.
+ we have a clear view of a sustainable $1.5 billion to
$2 billion defense business.
+ our engine business will see 2011 growth along with
our truck business, while capturing a greater share of
the revenues from key engine systems as we control
our own destiny.
+ our parts segment will realize the
benefits of our truck and engine
strategy, with double-digit top-
line growth and excellent return
on assets.
+ we’ve continued to invest in
new products that capitalize on
our strengths. And at the same
time, we’ve delivered the power,
durability and convenience our
customers require.
+ And we’ve partnered effectively
with other companies to rapidly
enter a range of high-potential
markets around the world.
summing up, navistar’s results
this year show clear progress
toward our longer-term goals of
$20 billion in revenue, $1.8 billion
in segment profit at the average of the cycle and
profitability at all points in the cycle.
sincerely,
D a n i e l c . U s t i a n
chairman, president and chief executive officer
navistar international corporation
2010 An n uAl R e poRt nAvi stAr | 11
e x pA n d i n g g lo b A l lY
Navistar’s Growing Family of Brands
nAvistAr trUck GrOUP
international truck Medium trucks, heavy trucks, severe service vehicles, military vehicles
ic Bus school buses and commercial buses
Workhorse custom chassis chassis for motor homes, vocational vehicles, trucks and buses
mahindra navistar Joint venture with Mahindra & Mahindra; trucks and buses for india and the region
monaco rv, LLc Motorized and towable recreational vehicles
continential mixer Rear discharge mixer products
nc2 Joint venture with caterpillar; commercial trucks outside north America and india
nAvistAr enGine GrOUP
maxxForce engines for all navistar vehicles and for other original equipment manufacturers
mWm international engines for vehicular, agricultural, industrial and marine markets in the
Mercosur and around the world
mahindra navistar Joint venture with Mahindra & Mahindra; engines for medium and heavy trucks
and buses in india
Pure Power technologies diesel power systems and emissions control systems for commercial
and defense markets
nAvistAr FinAnciAL services
navistar Financial corporation Financial solutions for the transportation industry, including truck, bus
and select trailer dealers
nAvistAr PArts GrOUP
navistar Parts oeM-recommended parts and expert service to keep customers’ businesses up and running
12 | nAvi stAr 2010 An n u Al R e poRt
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Form 10-K
‘ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2010
OR
For the transition period from
to
Commission file number 1-9618
NAVISTAR INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
4201 Winfield Road, P.O. Box 1488,
Warrenville, Illinois
(Address of principal executive offices)
36-3359573
(I.R.S. Employer Identification No.)
60555
(Zip Code)
Registrant’s telephone number, including area code (630) 753-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock (par value $0.10)
Cumulative convertible junior preference stock, Series D (par value $1.00)
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Í No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘ No Í
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 Í No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 Í No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Í
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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer Í
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No Í
As of April 30, 2010, the aggregate market value of common stock held by non-affiliates of the registrant was $3.1 billion. For purposes
of the foregoing calculation only, executive officers and directors of the registrant, and pension and 401(k) plans of the registrant have
been deemed to be affiliates.
As of November 30, 2010, the number of shares outstanding of the registrant’s common stock was 71,853,614, net of treasury shares.
Documents incorporated by reference: Portions of the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on
February 15, 2011 are incorporated by reference in Part III.
‘
Accelerated filer
Smaller reporting company ‘
[THIS PAGE INTENTIONALLY LEFT BLANK]
NAVISTAR INTERNATIONAL CORPORATION FISCAL YEAR 2010 FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
[Removed and reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . .
Item 9.
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
Page
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10
16
16
17
20
21
22
23
63
65
157
157
158
159
159
159
159
159
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160
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PART IV
EXHIBIT INDEX:
Exhibit 3
Exhibit 4
Exhibit 10
Exhibit 12
Exhibit 21
Exhibit 23.1
Exhibit 23.2
Exhibit 24
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1
Exhibit 99.2
Exhibit 99.3
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 Section 27A of the Securities Act of 1933, as amended (“Securities Act”),
Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the Private Securities
Litigation Reform Act of 1995. 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:
•
•
•
•
•
•
•
•
•
•
our development of new products and technologies;
the expected timing of product introduction and production schedules;
the anticipated volume, demand and markets for our products;
the anticipated performance and benefits of our products and technologies, including our exhaust gas
recirculation technologies;
the impact and benefits of acquisitions, strategic alliances and joint ventures we complete;
our compliance with governmental regulations and standards and costs relating thereto;
the impact and benefits of our labor union contracts;
the impact and costs and expenses of litigation we may be subject to now or in the future;
our business strategies; and
anticipated trends and outlook relating to 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 actual financial results or results of
operations and could cause actual results to differ materially from those in the forward-looking statements.
Factors that could cause or contribute to differences in our future financial results include those discussed in
Item 1A, Risk Factors, set forth in Part I, as well as those 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 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 Exchange Act and as a result, are obligated
to file periodic and current reports, proxy statements, and other information with the United States (“U.S.”)
Securities and Exchange Commission (“SEC”). We make our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and other 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. 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 file electronically with the SEC.
You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street,
N.E., Room 1850, Washington, D.C. 20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. Information on our website does not constitute part of
this Annual Report on Form 10-K.
Item 1.
Business
PART I
Navistar International Corporation (“NIC”), incorporated under the laws of the State of Delaware in 1993, is a
holding company whose principal operating subsidiaries are Navistar, Inc. and Navistar Financial Corporation
(“NFC”). References herein to the “Company,” “we,” “our,” or “us” refer to NIC and its subsidiaries, and certain
variable interest entities of which we are the primary beneficiary. We report our annual results for our fiscal year,
which ends October 31. As such, all references to 2010, 2009, and 2008 contained within this Annual Report on
Form 10-K relate to the fiscal year unless otherwise indicated. In July 2010, NFC filed a Form 15 with the SEC
and ceased filing reports under the Exchange Act. NIC continues to file periodic reports with the SEC.
Overview
We are an international manufacturer of International® brand commercial and military trucks, IC Bus (“IC”)
brand buses, MaxxForce™ brand diesel engines, Workhorse® Custom Chassis (“WCC”) brand chassis for motor
homes and step vans, and Monaco® RV (“Monaco”) recreational vehicles (“RV”), as well as a provider of
service parts for all makes of trucks and trailers. Additionally, we are a private-label designer and manufacturer
of diesel engines for the pickup truck, van, and sport utility vehicle (“SUV”) markets. We also provide retail,
wholesale, and lease financing of our trucks and parts.
Our Strategy
Our long term strategy is focused on three pillars:
I
Great Products
•
Growing our product line, including an expanded line of our Class 8 ProStar® and LoneStar® trucks
and Class 4/5 TerraStarTM trucks manufactured under the International brand, the AC series of small
shuttle buses manufactured under the IC brand, and the Vesta RV manufactured under the Monaco
brand
• Maintain strong market share in our “traditional” classes, including School bus Class 6 and 7 medium,
and Class 8 severe service
•
•
Focusing on engine research and development in order to have a competitive advantage using Exhaust
Gas Recirculation (“EGR”) and other technologies for compliance with 2010 emissions standards
Introducing our advanced engine technology in new markets
II
Competitive Cost Structure
•
•
Increasing our seamless integration of MaxxForce branded engine lines in our products, including the
establishment of our new MaxxForce 11, 13 and 15 engines
Reducing materials cost by increasing global sourcing, leveraging scale benefits, finding synergies
among strategic partnerships, reducing manufacturing conversion costs, and seeking opportunities for
vertical integration
III Profitable Growth
• Working in cooperation with the U.S. military to provide an extensive line of defense vehicles and
product support, including but not limited to, Mine Resistant Ambush Protected (“MRAP”) vehicles
and other vehicles derived from our existing truck platforms
• Minimizing the impact of our North American markets cyclicality by growing our Truck and Parts
segments and “expansion” markets sales, such as Mexico, international export, U.S. and non-U.S.
military, RV, commercial bus, and commercial step van
•
Broadening our Engine segment customer base within the commercial truck market, other consumer
and specialty vehicle products, and other non-vehicle-based platforms
1
The two key enablers to the above strategy are as follows:
I
Leverage our assets and those of our partners
•
Grow in our North American markets and globally through strategic partnerships and joint ventures,
with partners including Mahindra & Mahindra Ltd. for markets in India and Caterpillar Inc.
(“Caterpillar”) for various markets outside of North America and the Indian subcontinent, and pending
ventures with Anhui Jianghuai Automobile Co. Ltd. (“JAC”) for markets in China, to increase speed to
market, reduce risk, and lower the cost of investment
• Maintain product and plant flexibility to fully utilize our existing facilities, people, and technologies,
including actions such as our recent labor agreement with the United Automobile, Aerospace and
Agricultural Implement Workers of America (“UAW”)
•
•
Attain further operating efficiencies and economies of scale through consolidating and centralizing
certain facilities and functions, including the pending consolidation of our executive management,
certain business operations, and product development at a new world headquarters site in Lisle, Illinois
and the planned development of a testing and validation center to be located within our Melrose Park
facility, as well as other actions such as the integration of all bus production in a single location
Combine global purchasing relationships to achieve scale and sourcing anywhere in the world to
contain costs
II
Control our destiny
•
•
•
Control the development process and associated intellectual property of our products
Utilize key supplier competencies to reduce costs of components and improve quality
Ensure the health and growth of our distribution network to provide our products to key markets
Our Operating Segments
We operate in four industry segments: Truck, Engine, Parts (collectively called “manufacturing operations”), and
Financial Services, which consists of NFC and our foreign finance operations (collectively called “financial
services operations”). Corporate contains those items that do not fit into our four segments. Selected financial
data for each segment can be found in Note 18, Segment reporting, to the accompanying consolidated financial
statements.
Truck Segment
The Truck segment manufactures and distributes a full line of Class 4 through 8 trucks and buses in the common
carrier, private carrier, government/service, leasing, construction, energy/petroleum, military vehicles, and
student and commercial transportation markets under the International and IC brands. This segment also
produces chassis for motor homes and commercial step-van vehicles under the WCC brand and RVs, including
non-motorized towables, under the Monaco family of brands. The Truck segment is our largest operating
segment based on total external sales and revenues.
The Truck segment’s manufacturing operations in the U.S., Canada, and Mexico (collectively called “North
America”) consist principally of the assembly of components manufactured by our suppliers, although this
segment also produces certain sheet metal components, including truck cabs.
We compete primarily in the School bus and Class 6 through 8 medium and heavy truck markets within the
U.S. and Canada, which we consider our “traditional” markets. We continue to grow in “expansion” markets,
which include Mexico, international export, U.S. and non-U.S. military, RV, commercial step-van, and other
truck and bus markets. In recent years, we have successfully grown our “expansion” market by increasing our
2
sales to the U.S. military. The products we sell to the U.S. military are derivatives of our commercial vehicles
and allow us to leverage our manufacturing and engineering expertise, utilize existing plants, and seamlessly
integrate our engines. This segment also engages in various strategic joint ventures to further our product reach to
the global markets including Blue Diamond Truck (“BDT”), Mahindra Navistar Automotives, Ltd., and NC2
Global, LLC (“NC2”).
We market our commercial products through our extensive independent dealer network in North America, which
offers a comprehensive range of services and other support functions to our end users. Our commercial trucks are
distributed in virtually all key markets in North America, as well as select markets outside of North America,
through our distribution and service network comprised of 783 U.S. and Canadian dealer and retail outlets, 91
Mexican dealer locations, and 103 international dealer locations, as of October 31, 2010. We occasionally
acquire and operate dealer locations (“Dealcor”) for the purpose of transitioning ownership. In addition, our
network of used truck centers and International certified used truck dealers in the U.S. and Canada provides
trade-in support to our dealers and national accounts group, and markets all makes and models of reconditioned
used trucks to owner-operators and fleet buyers. Truck segment sales and revenues are dependent on trucks that
have been invoiced to customers (“chargeouts”).
The markets in which the Truck segment competes are subject to considerable volatility and fluctuation in
response to cycles in the overall business environment. These markets are particularly sensitive to the industrial
sector, which generates a significant portion of the freight tonnage hauled. Government regulation has impacted,
and will continue to impact, trucking operations and the efficiency and specifications of equipment.
The Class 4 through 8 truck and bus markets in North America are highly competitive. Major U.S. domestic
competitors include: PACCAR Inc. (“PACCAR”) and Ford Motor Company (“Ford”). Competing foreign-
controlled domestic manufacturers include: Freightliner and Western Star (both subsidiaries of Daimler-Benz AG
(“Mercedes Benz”)), and Volvo and Mack (both subsidiaries of Volvo Global Trucks). Major U.S. military
vehicle competitors include: BAE systems, Force Protection, Inc., General Dynamics Land Systems, General
Purpose Vehicles, Oshkosh Truck, and Protected Vehicles Incorporated. In addition, smaller, foreign-controlled
market participants such as Isuzu Motors America, Inc. (“Isuzu”), UD Trucks North America (formerly known as
Nissan Diesel America, Inc. (“UD Trucks”)), Hino (a subsidiary of Toyota Motor Corporation (“Toyota”)), and
Mitsubishi Motors North America, Inc. (“Mitsubishi”) are competing in the U.S. and Canadian markets with
primarily imported products. For the RV business, our major competitors include: Winnebago Industries, Inc.,
Thor Industries, Inc., Fleetwood RV, Inc., and Coachman Industries, Inc. In Mexico, the major domestic
competitors are Kenmex (a subsidiary of PACCAR) and Mercedes Benz.
Engine Segment
The Engine segment designs and manufactures diesel engines across the 50 through 475 horsepower range for
use primarily in our Class 6 and 7 medium trucks, military vehicles, buses, and Class 8 heavy truck models, and
for sale to original equipment manufacturers (“OEMs”) in North and South America for SUVs, pick-ups, and
other consumer and specialty vehicle products. This segment also sells engines for industrial and agricultural
applications, supplies engines for WCC, Low-Cab Forward (“LCF”), Class 5 vehicles, and produces MaxxForce
11 and 13 Big-Bore engines. This segment engages in various strategic joint ventures to further our product reach
to the global markets. The engine segment has made an investment, together with Ford, in Blue Diamond Parts
(“BDP”), which is responsible for the sale of service parts to Ford. The Engine segment also has an investment
together with Mahindra & Mahindra Ltd. in an engine joint venture in India called Mahindra-Navistar Engines
Private Ltd. Our strategy is to continue our efforts to diversify our Engine segment sales and profitably grow our
global business through our South American subsidiary and our joint ventures. The Engine segment is our second
largest operating segment based on total external sales and revenues.
The Engine segment has manufacturing operations in the U.S., Brazil, and Argentina. The operations at these
facilities consist principally of the assembly of components manufactured by our suppliers, as well as machining
3
operations relating to steel and grey iron components, and certain higher technology components necessary for
our engine manufacturing operations. Our diesel engines are sold under the MaxxForce brand as well as
produced for other OEMs.
In the U.S. and Canada, mid-range commercial truck diesel engine market our primary competitors are Cummins
Inc. (“Cummins”), Mercedes Benz, Isuzu, and Hino.
In South America, we have a substantial share of the diesel engine market in the mid-sized pickup and SUV
markets as well as the mid-range diesel engines produced in that market. Our South American subsidiary MWM
International Industria De Motores Da America Do Sul Ltda. (“MWM”) is a leader in the South American
mid-range diesel engine market. MWM sells products in more than 35 countries on five continents and provides
customers with additional engine offerings in the agriculture, marine, and light truck markets. MWM competes
with Mitsubishi and Toyota in the Mercosul pickup and SUV markets; Cummins, Mercedes Benz, and Fiat
Powertrain in the Light and Medium truck markets; Mercedes Benz, Cummins, Scania, Volvo, and FPT in the
heavy truck market; Mercedes Benz in the bus market; New Holland (a subsidiary of CNH Global N.V.), Sisu
Diesel (a subsidiary of AGCO Corporation), and John Deere in the agricultural market; and Scania and Cummins
in the stationary market.
In Mexico, we compete in Classes 4 through 8 with MaxxForce 4.8, 7, DT, and 9 engines, facing competition
from Cummins, Isuzu, Hino, Mercedes Benz, and Ford. The application of the new MaxxForce 11 and 13
Big-Bore engines in Mexico will depend on the availability of low sulfur diesel fuel throughout the country. In
buses, we compete in Classes 6 through 8 with I-6 MaxxForce DT and 9 engines and I-4 MWM engines branded
MaxxForce 4.8, having as a main competitor Mercedes Benz with 904 and 906 series engines.
Parts Segment
The Parts segment supports our brands of International commercial and military trucks, IC buses, WCC chassis,
MaxxForce engines, as well as our other product lines, by providing customers with proprietary products together
with a wide selection of other standard truck, trailer, and engine service parts. We distribute service parts in
North America and the rest of the world through the dealer network that supports our Truck and Engine
segments.
We believe our extensive dealer channel provides us with an advantage in serving our customers by having our
parts available when our customers require service. Goods are delivered to our customers either through one of
our eleven regional parts distribution centers in North America or through direct shipment from our suppliers for
parts not generally stocked at our distribution centers. We have a dedicated parts sales team within North
America, as well as three national account teams focused on large fleet customers, a global sales team, and a
government and military team. In conjunction with the Truck sales and technical service group, we provide an
integrated support team that works to find solutions to support our customers.
Financial Services Segment
The 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. Substantially all revenues earned by the Financial
Services segment are derived from supporting the sales of our vehicles and products. We also finance wholesale
and retail accounts receivable, of which substantially all revenues earned are received from the Truck and Parts
segments. On a limited basis, we may finance sales of new products (including trailers) of other manufacturers
regardless of whether they are designed or customarily sold for use with our truck products. The Financial
Services segment continues to meet the primary goal of providing financing to our customers while working to
mitigate the impact of the recession in the U.S. and Mexico markets, customer defaults, and impaired vehicle
asset values.
4
This segment provided wholesale financing for 96% of our new truck inventory sold by us to our dealers and
distributors in the U.S. both in 2010 and 2009, and provided retail and lease financing for 8% and 9% of all new
truck units sold or leased by us to retail customers in the U.S. for 2010 and 2009, respectively.
In 2010, we entered into a three-year Operating Agreement (with one-year automatic extensions and subject to
early termination provisions) with GE Capital Corporation and GE Capital Commercial, Inc. (collectively “GE”).
Under the terms of the agreement, GE became our preferred source of retail customer financing for equipment
offered by us and our dealers in the U.S. We provide GE a loss sharing arrangement for certain credit losses, and
under limited circumstances NFC retains the rights to originate retail customer financing.
Government Contracts
As a U.S. government contractor, we are subject to specific regulations and requirements as mandated by our
contracts. These regulations include Federal Acquisition Regulations, Defense Federal Acquisition Regulations,
and the Code of Federal Regulations. We are also subject to routine audits and investigations by U.S. government
agencies such as the Defense Contract Management Agency and Defense Contract Audit Agency. These agencies
review and assess compliance with contractual requirements, cost structure, cost accounting, and applicable laws,
regulations, and standards.
Engineering and Product Development
Our engineering and product development programs are focused on product improvements, innovations, and cost
reductions. As a truck manufacturer, costs have been focused on further development of our existing products
such as military vehicles, Big-Bore engines, ProStar and LoneStar trucks as well as modifications of our trucks to
accommodate 2010 emissions-compliant engines. As a diesel engine manufacturer, we have incurred research,
development, and tooling costs to design our engine product lines to meet emissions regulatory requirements and
to provide engine solutions to support a global marketplace. Our engineering and product development
expenditures were $464 million in 2010 compared to $433 million in 2009 and $384 million in 2008.
We continue to invest in research, development, and tooling equipment to design and produce our engine product
lines to meet U.S. Environmental Protection Agency (“EPA”) emissions requirements. We have chosen advanced
EGR, combined with other strategies, as our solution to meet the 2010 emissions requirements. We believe
coupling EGR with other emissions strategies gives our products advantages over our competitors’ liquid-based
urea Selective Catalytic Reduction (“SCR”) solution and enables us to maintain flexibility in meeting emissions
requirements. We continue to evaluate our emissions strategies on a platform-by-platform basis to achieve the
best long-term solution for our customers in each of our vehicle applications. Our continued investment in
research and development includes the further enhancement of our advanced EGR technology and the ongoing
development of reliable, high-quality, high-performance and fuel-efficient products.
Acquisitions, Strategic Agreements, and Joint Ventures
We continuously seek and evaluate opportunities in the marketplace that provide us with the ability to leverage
new technology, expand our engineering expertise, provide access to “expansion” markets, and identify
component and material sourcing alternatives. During the recent past, we have entered into a number of
collaborative strategic relationships and have acquired businesses that allowed us to generate manufacturing
efficiencies, economies of scale, and market growth opportunities. We also routinely re-evaluate our existing
relationships to determine whether they continue to provide the benefits we originally envisioned as well as
review potential partners for new opportunities. The Company considers the following joint ventures and
businesses an integral part of our long-term growth strategy:
•
In 2006, we finalized our joint venture with Mahindra & Mahindra Ltd., a leading Indian manufacturer of
multi-utility vehicles and tractors to produce commercial trucks and buses in India. Furthermore, in 2008,
we signed a second joint venture agreement with Mahindra & Mahindra Ltd. to produce diesel engines for
5
•
•
•
medium and heavy commercial trucks and buses in India. We have a 49% ownership in each joint venture,
which operate under the names of Mahindra-Navistar Automotives Ltd. and Mahindra-Navistar Engines
Private Ltd., respectively. These joint ventures provide us engineering services, as well as advantages of
scale and global sourcing for a more competitive cost structure, and afford us the opportunity to enter
markets in India that have significant growth potential for commercial vehicles and diesel power. In January
2010, Mahindra-Navistar Automotives Ltd. launched a family of commercial trucks and tractors in the range
of 25, 31, 40 and 49 ton (equivalent gross vehicle weight ranges of approximately 56,000 pounds up to
109,000 pounds).
In 2009, we completed a 50/50 joint venture with Caterpillar resulting in the formation of NC2. This joint
venture will develop, manufacture, and distribute conventional and cab-over truck designs to serve the
global commercial truck market. NC2 will initially focus on markets including Australia, Brazil, China,
Russia, South Africa, and Turkey, and this product line will be sold under both the CAT and International
brands. Also in 2009, we signed a strategic agreement with Caterpillar to design and develop a new
proprietary, purpose-built heavy-duty CAT vocational truck for the North American market. The trucks will
be sold and serviced though the CAT North American dealer network. Scheduled production for this
product is expected in mid-2011. In October 2010, NC2 launched CAT-branded on-highway trucks in the
Australian market and launched operations in Brazil, where it will assemble and distribute commercial
trucks under both the CAT and International brands.
In 2009, we acquired all of the membership interests and certain assets associated with the amplified
common rail injector business of Continental Diesel Systems US, LLC (“CDS”). CDS was a leading
manufacturer of injectors used in fuel systems that are installed into various diesel engines. We believe the
acquired company, renamed Pure Power Technologies, LLC (“PPT”), will allow us to further vertically
integrate research and development, engineering, and manufacturing capabilities to produce world-class
diesel power systems and advanced emissions control systems. The seamless integration of the fuel, air, and
after-treatment systems that PPT provides is enabled by the focus on optimized solutions through combining
the design, development, analysis, and manufacturing into a single company. While PPT currently focuses
primarily on intercompany customers, we anticipate that this business will provide additional external
opportunities in the future.
In September 2010, we signed a joint venture agreement with JAC to develop, build, and market advanced
diesel commercial engines in China. Our NC2 joint venture also signed a joint venture agreement with JAC
to develop, build, and market advanced commercial vehicles in China. The engine joint venture will focus
on meeting emerging needs of the Chinese commercial truck market with Euro IV and Euro V compliant
technology and will provide application engineering development, product design and technology
advancements, to support the truck joint venture and other engine requirements of JAC’s product
portfolio. A dedicated manufacturing facility in Hefei, Anhui Province of China is expected to be
constructed to produce JAC and the Navistar-designed MaxxForce diesel engines. We anticipate the truck
joint venture will build vehicles at an existing JAC manufacturing facility dedicated to medium and heavy
duty trucks. The formation of the joint ventures is pending necessary approvals from the Chinese
government, and is subject to finalization of certain ancillary agreements among the parties.
Backlog
Our worldwide backlog of unfilled truck orders (subject to cancellation or return in certain events) at October 31,
2010 and 2009 was 19,000 and 26,100 units, respectively. Although the backlog of unfilled orders is 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.
Order backlogs exclude units in inventory awaiting additional modifications or delivery to the end customer.
6
Employees
As our business requirements change, fluctuations may occur within our workforce from year to year. The
following tables summarize the number of employees worldwide as of the dates indicated and an additional
subset of active union employees represented by the UAW, the National Automobile, Aerospace and Agricultural
Implement Workers of Canada (“CAW”), and other unions, for the periods as indicated:
Employees worldwide
Total active employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total inactive employees(A)
15,800
2,900
15,100
2,800
15,900
1,900
Total employees worldwide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,700
17,900
17,800
As of October 31,
2010
2009
2008
As of October 31,
2010
2009
2008
Total active union employees
Total UAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total CAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,700
—
2,400
2,600
—
1,900
2,000
1,000
2,500
(A) Employees are considered inactive in certain situations including disability leave, leave of absence, layoffs, and work stoppages. Inactive
employees as of October 31, 2010 and 2009 include approximately 1,100 CAW employees related to their contract expiration on
June 30, 2009.
On October 30, 2010, our UAW represented employees ratified a new four-year labor agreement that replaced
the prior contract that expired October 1, 2010. Our labor contract with the CAW expired June 30, 2009 and
negotiations for a new collective bargaining agreement are ongoing. See Item 1A, Risk Factors, for further
discussion related to the risk associated with labor and work stoppages.
Patents and Trademarks
We continuously obtain patents on our inventions and own a significant patent portfolio. Additionally, many of
the components we purchase for our products are protected by patents that are owned or controlled by the
component manufacturer. We have licenses under third-party patents relating to our products and their
manufacture and grant licenses under our patents. The monetary royalties paid or received under these licenses
are not material.
Our primary trademarks are an important part of our worldwide sales and marketing efforts and provide instant
identification of our products and services in the marketplace. To support these efforts, we maintain, or have
pending, registrations of our primary trademarks in those countries in which we do business or expect to do
business. We grant licenses under our trademarks for consumer-oriented goods, such as toy trucks and apparel,
outside the product lines that we manufacture. The monetary royalties received under these licenses are not
material.
Supply
We purchase raw materials, parts, and components from numerous outside suppliers. To avoid duplicate tooling
expenses and to maximize volume benefits, single-source suppliers fill a majority of our requirements for parts
and components.
The impact of an interruption in supply will vary by commodity and type of part. Some parts are generic to the
industry while others are of a proprietary design requiring unique tooling, which require additional effort to
relocate. However, we believe our exposure to a disruption in production as a result of an interruption of raw
7
materials and supplies is no greater than the industry as a whole. In order to alleviate losses resulting from an
interruption in supply, we maintain contingent business interruption insurance for loss of earnings and/or extra
expense directly resulting from physical loss or damage at a direct supplier location.
While we believe we have adequate assurances of continued supply, the inability of a supplier to deliver could
have an adverse effect on production at certain of our manufacturing locations.
Impact of Government Regulation
Truck and engine manufacturers continue to face significant governmental regulation of their products, especially
in the areas of environment and safety. New on-highway emissions standards commenced in the U.S. on
January 1, 2007, which reduced allowable particulate matter and allowable nitrogen oxide and have reached the
last phase-in period effective with engine model year 2010. This change in emissions standards resulted in a
significant increase in the cost of our products to meet these emissions levels.
We have certified products that comply with the applicable 2010 EPA emissions requirements. In 2010, the
initial phase-in of on-board diagnostics requirements commenced for the initial family of truck engines and those
products have also been certified. The phase-in for the remaining engine families occurs in 2013. Canadian
heavy-duty engine emissions regulations essentially mirror those of the EPA. In Mexico, we offer EPA 2004 and
Euro IV engines that comply with current standards in that country.
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 sources of noise, and we therefore work closely with OEMs to develop
strategies to reduce engine noise. We are also subject to the National Traffic and Motor Vehicle Safety Act
(“Safety Act”) and Federal Motor Vehicle Safety Standards (“Safety Standards”) promulgated by the National
Highway Traffic Safety Administration (“NHTSA”).
Government regulation related to climate change is under consideration at the U.S. federal and state
levels. Because our products use fossil fuels, they may be impacted indirectly due to regulation affecting the cost
of fuels. In May 2010, President Obama directed the EPA and the Department of Transportation to adopt rules by
July 30, 2011 setting greenhouse gas emission and fuel economy standards for medium and heavy-duty vehicles
and heavy-duty engines beginning with model year 2014. These standards will impact development costs for
vehicles and engines as well as the cost of vehicles and engines. The EPA and NHTSA published a proposed rule
for greenhouse gas emissions and fuel economy requirements for trucks and heavy-duty engines on
November 30, 2010. We are actively engaged in providing the EPA and NHTSA input on the proposed rule. The
rule is expected to have an initial phase in starting with model year 2014 and a final phase in occurring in model
year 2017.
Our facilities may also be subject to regulation related to climate change. The EPA is proceeding with various
efforts to regulate greenhouse gas emissions under existing Clean Air Act authorities. We continue to evaluate
the impact these regulatory developments may have on our facility operations.
These truck standards may also create opportunities for the Company, which has pursued the development of
hybrid and electric vehicles and has sought incentives for the development of technology to improve fuel
economy. Costs related to these regulatory proposals cannot be quantified at present because the regulatory
proposals themselves are in the early stages of development.
8
EXECUTIVE OFFICERS OF NIC
The following selected information for each of our current executive officers (as defined by regulations of the
SEC) was prepared as of November 30, 2010.
Daniel C. Ustian, 60, has served as President and Chief Executive Officer of NIC since 2003 and Chairman of
the Board of Directors of NIC since 2004. He also served as Chairman of Navistar, Inc. since 2004 and President
and Chief Executive Officer of Navistar, Inc. since 2003 and a director since 2002. Prior to these positions, he
was President and Chief Operating Officer from 2002 to 2003, and President of the Engine Group of Navistar,
Inc. from 1999 to 2002, and he served as Group Vice President and General Manager of Engine & Foundry from
1993 to 1999. He is a member of the Business Roundtable and Society of Automotive Engineers.
Andrew J. Cederoth, 45, has served as Executive Vice President and Chief Financial Officer of NIC since
September 2009. Mr. Cederoth also served as a director of Navistar, Inc. since April 2009, and Executive Vice
President and Chief Financial Officer at Navistar, Inc. since September 2009. Prior to these positions he was
interim principal financial officer and Senior Vice President—Corporate Finance of NIC from June 2009 to
September 2009, Senior Vice President—Corporate Finance from April 2009 to June 2009 of NIC, Vice
President and Chief Financial Officer of the Engine Division of Navistar, Inc. from 2006 to April 2009, Vice
President and Treasurer of Navistar Financial Corporation from 2001 to 2005.
Steven K. Covey, 59, has served as Senior Vice President and General Counsel of NIC since 2004 and Chief
Ethics Officer since 2008. Mr. Covey also served as Senior Vice President and General Counsel of Navistar, Inc.
since 2004 and Chief Ethics Officer since 2008. Prior to these positions, Mr. Covey served as Deputy General
Counsel of Navistar, Inc. from April 2004 to September 2004 and as Vice President and General Counsel of
Navistar Financial Corporation from 2000 to 2004. Mr. Covey also served as Corporate Secretary for NIC from
1990 to 2000; and Associate General Counsel of Navistar, Inc. from 1992 to 2000.
James M. Moran, 45, has served as Vice President and Treasurer of NIC since 2008. Mr. Moran also served as
Vice President and Treasurer of Navistar, Inc. since 2008. Prior to these positions, Mr. Moran served as Vice
President and Assistant Treasurer of both NIC and Navistar, Inc. from 2007 to 2008 and Director of Corporate
Finance of Navistar, Inc. from 2005 to 2007. Prior to joining NIC, Mr. Moran served as Vice President and
Treasurer of R.R. Donnelley & Sons Company, an international provider of print and print related services, from
2003 to 2004 and Assistant Treasurer of R.R. Donnelley & Sons Company from 2002 to 2003. Prior to that,
Mr. Moran held various positions in corporate finance, strategic planning, and credit and collections at R.R.
Donnelley & Sons Company.
Richard C. Tarapchak, 45, has served as Vice President and Controller (Principal Accounting Officer) of NIC
since March 2010. Prior to this position, Mr. Tarapchak served as Vice President—Strategic Initiatives of
Navistar, Inc. since 2008. Mr. Tarapchak also served as Vice President—Chief Financial Officer of the Truck
Group of Navistar, Inc. from 2005 to 2008, Director—Corporate Financial Analysis of Navistar, Inc. from 2003
to 2005 and Director, Finance—Operations of Navistar, Inc. from 2000 to 2003.
Curt A. Kramer, 42, has served as Corporate Secretary of NIC since 2007. Mr. Kramer also served as Associate
General Counsel and Corporate Secretary of Navistar, Inc. since 2007. Prior to these positions, Mr. Kramer
served as General Attorney of Navistar, Inc. from April 2007 to October 2007, Senior Counsel of Navistar, Inc.
from 2004 to 2007, Senior Attorney of Navistar, Inc. from 2003 to 2004 and Attorney of Navistar, Inc. from
2002 to 2003. Prior to joining Navistar, Inc., Mr. Kramer was in private practice.
D.T. (Dee) Kapur, 58, has served as President of the Truck Group of Navistar, Inc. since 2003. Prior to joining
Navistar, Inc., Mr. Kapur was employed by Ford Motor Company, a leading worldwide automobile
manufacturer, from 1976 to 2003, most recently serving as Executive Director of North American Business
9
Revitalization, Value Engineering from 2002 to 2003; Executive Director of Ford Outfitters, North American
Truck, from 2001 to 2002; and Vehicle Line Director, Full Size Pick-ups and Utilities from 1997 to 2001. In July
2009, Mr. Kapur joined the board of directors at Bucyrus International, Inc.
Phyllis E. Cochran, 58, has served as President of the Parts Group of Navistar, Inc. since November 2009. Prior
to this position, Ms. Cochran served as Senior Vice President and General Manager of the Parts Group of
Navistar, Inc. since 2007, and Vice President and General Manager of the Parts Group of Navistar, Inc. from
2004 to 2007. Ms. Cochran was also Chief Executive Officer and General Manager of Navistar Financial
Corporation from 2003 to 2004. Ms. Cochran was Executive Vice President and General Manager of Navistar
Financial Corporation from 2002 to 2003. Ms. Cochran also served as Vice President of Operations for Navistar
Financial Corporation from 2000 to 2002; and Vice President and Controller for Navistar Financial Corporation
from 1994 to 2000. She is a director of The Mosaic Company, a world leading producer and marketer of
concentrated phosphate and potash crop nutrients. She is a director of Women in Trucking, a not for profit
organization to promote employment of women in the truck industry.
Gregory W. Elliott, 49, has served as Senior Vice President, Human Resources and Administration of Navistar,
Inc. since 2008. Prior to this position, Mr. Elliott served as Vice President, Corporate Human Resources and
Administration of Navistar, Inc. from 2004 to 2008 and as Vice President, Corporate Communications of
Navistar, Inc., from 2000 to 2004. Prior to joining Navistar, Inc., Mr. Elliott served as Director of Executive
Communications of General Motors Corporation from 1997 to 1999.
Item 1A. Risk Factors
The Company’s financial condition, results of operations, and cash flows are subject to various risks, many of
which are not exclusively within the Company’s control that may cause actual performance to differ materially
from historical or projected future performance. We have in place an Enterprise Risk Management (“ERM”)
process that involves systematic risk identification and mitigation covering the categories of Strategic, Financial
Operational and Compliance risk. The goal of ERM is not to eliminate all risk, but rather identify, assess and
rank risks; assign, mitigate and monitor risks; and report the status of our risk to the Management Risk
Committee and the Board of Directors and its Committees. The risks described below could materially and
adversely affect our business, financial condition, results of operations, or cash flows. These risks are not the
only risks that we face and our business operations could also be affected by additional factors that are not
presently known to us or that we currently consider to be immaterial to our operations.
Our technology solution to meet U.S. federal and state emissions requirements may not be successful or may
be more costly than planned.
Truck and engine manufacturers continue to face significant governmental regulation of their products, especially
in the areas of environment and safety. In that regard, we have incurred, and will continue to incur, significant
research, development, and tooling costs to design and produce our engine product lines to meet EPA and
California Air Resources Board (“CARB”) emissions requirements. The new on-highway heavy duty emissions
standards that came into effect in the U.S. for the 2007 model year reduced allowable particulate matter and
allowable nitrogen oxide. This change in emissions standards resulted in a significant increase in the cost of our
products to meet these emissions levels. An emissions cap as part of the phase-in process for the heavy duty
engines comes into effect for the model year 2010. In addition, regulations requiring on-board diagnostics began
the initial phase-in during 2010 for truck engines and are a part of our product plans. Full phase-in of on-board
diagnostics regulations will occur in 2013.
Most other truck and engine manufacturers have chosen liquid-based urea SCR systems to address the 2010
emissions standards. We intend to address the 2010 emissions requirements for our core applications through
advances in engine emissions controls and continue to explore other cost effective alternative solutions for
meeting these emissions standards. Our technology solution to meet U.S. federal 2010 emissions requirements
may not be successful or may be more costly than planned.
10
We may not achieve all of the expected benefits from our current business strategies and initiatives.
We have recently completed acquisitions and joint ventures and announced our intention to explore a number of
potential additional joint ventures and strategic alliances, as well as other business initiatives. We cannot assure
you that we will complete the joint ventures, strategic alliances or business initiatives we have expressed an
interest in exploring, or that our previous or future acquisitions, joint ventures, strategic alliances or business
initiatives will be successful or will generate the expected benefits. In addition, we cannot assure you we will not
have disputes arise with our joint venture partners and that such disputes will not lead to litigation or otherwise
have a material adverse effect on the joint venture or our relationship with our joint venture partners. Failure to
successfully manage and integrate these and potential future acquisitions, joint ventures and strategic alliances
could materially harm our financial condition, results of operations and cash flows.
Our products are subject to export limitations and we may be prevented from shipping our products to certain
nations or buyers.
We are subject to federal licensing requirements with respect to the sale and support in foreign countries of
certain of our products and the importation of components for our products. In addition, we are obligated to
comply with a variety of federal, state and local regulations and procurement policies, both domestically and
abroad, governing certain aspects of our international sales and support, including regulations promulgated by,
among others, the U.S. Departments of Commerce, Defense and State and the U.S. Department of Justice.
Such licenses may be denied for reasons of U.S. national security or foreign policy. In the case of certain large
orders for exports of defense equipment, the Department of State must notify Congress at least 15 to 30 days,
depending on the size and location of the sale, prior to authorizing certain sales of defense equipment and
services to foreign governments. During that time, Congress may take action to block the proposed sale. We can
give no assurances that we will continue to be successful in obtaining the necessary licenses or authorizations or
that Congress will not prevent or delay certain sales. Any significant impairment of our ability to sell products
outside of the U.S. could negatively impact our results of operations and financial condition.
For products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, we are subject to
U.S. laws and regulations governing international trade and exports, including, but not limited to International
Traffic in Arms Regulations, Export Administration Regulations, the Foreign Military Sales program and trade
sanctions against embargoed countries and destinations, administered by the Office of Foreign Assets Control,
U.S. Department of the Treasury. A determination by the U.S. government that we have failed to comply with
one or more of these export controls or trade sanctions could result in civil or criminal penalties, including the
imposition of significant fines, denial of export privileges, loss of revenues from certain customers, and
debarment from participation in U.S. government contracts.
We are subject to the Foreign Corrupt Practices Act (the “FCPA”) and other laws which prohibit improper
payments to foreign governments and their officials by U.S. and other business entities. We operate in countries
known to experience corruption. Our operations in such countries create the risk of an unauthorized payment by
one of our employees or agents which could be in violation of various laws including the FCPA.
Additionally, the failure to obtain applicable governmental approval and clearances could materially and
adversely affect our ability to continue to service the government contracts we maintain. Exports of some of our
products to certain international destinations may require shipment authorization from U.S. export control
authorities, including the U.S. Departments of Commerce and State, and authorizations may be conditioned on
end-use restrictions.
Our international business is also highly sensitive to changes in foreign national priorities and government
budgets. Sales of military products are affected by defense budgets (both in the U.S. and abroad) and U.S. foreign
policy.
11
We must comply with numerous miscellaneous federal national security laws, procurement regulations, and
procedures, as well as the rules and regulations of foreign jurisdictions, and our failure to comply could
adversely affect our business.
We must observe laws and regulations relating to the formation, administration and performance of federal
government contracts that affect how we do business with our clients and impose added costs on our business.
For example, the federal acquisition regulations, foreign government procurement regulations and the industrial
security regulations of the Department of Defense and related laws include provisions that:
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•
•
allow our government clients to terminate or not renew our contracts if we come under foreign ownership,
control or influence;
allow our government clients to terminate existing contracts for the convenience of the government;
require us to prevent unauthorized access to classified information; and
require us to comply with laws and regulations intended to promote various social or economic goals.
We are subject to industrial security regulations of the U.S. Department of State, Department of Commerce and
the Department of Defense and other federal agencies that are designed to safeguard against foreigners’ access to
classified or restricted information. As we expand our operations internationally, we will also become subject to
the rules and regulations of foreign jurisdictions. If we were to come under foreign ownership, control or
influence, we could lose our facility security clearances, which could result in our federal government customers
terminating or deciding not to renew our contracts and could impair our ability to obtain new contracts.
A failure to comply with applicable laws, regulations or procedures, including federal regulations regarding the
procurement of goods and services and protection of classified information, could result in contract termination,
loss of security clearances, suspension or prohibition from contracting with the federal government, civil fines
and damages and criminal prosecution and penalties, any of which would materially adversely affect our
business.
Our business may be adversely affected by government contracting risks.
We derived approximately 15%, 25%, and 27% of our revenues for 2010, 2009, and 2008, respectively, from the
U.S. government. Many of our existing U.S. government contracts extend over multiple years and are
conditioned upon the continuing availability of congressional appropriations. Congress usually appropriates
funds on a fiscal-year basis and if the congressional appropriations for a program under which we are contractors
are not made, or are reduced or delayed, our contract could be cancelled or government purchases under the
contract could be reduced or delayed, which could adversely affect our financial condition, results of operations,
and cash flows. Although we have multiple bids and quotes, there are no guarantees that they will be awarded to
us in the future or that volumes will be similar to volumes under previously awarded contracts. In addition, U.S.
government contracts generally permit the contracting government agency to terminate the contract, in whole or
in part, either for the convenience of the government or for default based on our failure to perform under the
contract. If a contract is terminated for convenience, we would generally be entitled to the payment of our
allowable costs and an allowance for profit on the work performed. If one of our government contracts were to be
terminated for default, we could be exposed to liability and our ability to obtain future contracts could be
adversely affected.
Our liquidity position may be adversely affected by a continued downturn in our industry.
Any downturn in our industry can adversely affect our operating results. In the event that industry conditions
remain weak for any significant period of time, our liquidity position may be adversely affected, which may limit
our ability to complete product development programs, capital expenditure programs, or other strategic initiatives
at currently anticipated levels.
12
We have significant under-funded postretirement obligations.
The under-funded portion of our projected benefit obligation was $1.5 billion for pension benefits at both
October 31, 2010 and 2009, and $653 million and $1.2 billion for postretirement healthcare benefits at
October 31, 2010 and 2009, respectively. Moreover, we have assumed expected rates of return on plan assets and
growth rates of retiree medical costs and the failure to achieve the expected rates of return and growth rates, as
well as reductions in interest rates, could have an adverse impact on our under-funded postretirement obligations,
financial condition, results of operations and cash flows. The volatility in the financial markets affects the
valuation of our pension assets and liabilities, resulting in potentially higher pension costs and higher levels of
under-funding in future periods. The requirements set forth in the Employee Retirement Income Security Act of
1974, as amended, and the Internal Revenue Code of 1986, as amended, as applicable to our U.S. pension plan
(including such timing requirements) mandated by the Pension Protection Act of 2006 to fully fund our U.S.
pension plan, net of any current or possible future legislative or governmental agency relief, could also have an
adverse impact on our business, financial condition, results of operations and cash flows even though the recently
enacted pension funding relief legislation Preservation of Access to Care for Medicare Beneficiaries and Pension
Relief Act of 2010 (the “PRA 2010”) may have reduced our funding requirements over the next five years.
We are exposed to political, economic, and other risks that arise from operating a multinational business.
We have significant operations in foreign countries, primarily in Canada, Mexico, Brazil, Argentina, and India.
Accordingly, our business is subject to the political, economic, and other risks that are inherent in operating in
those countries and internationally. These risks include, among others:
•
•
•
•
•
trade protection measures and import or export licensing requirements;
tax rates in certain foreign countries that exceed those in the U.S. and the imposition of withholding
requirements for taxes on foreign earnings;
difficulty in staffing and managing international operations and the application of foreign labor regulations;
currency exchange rate risk; and
changes in general economic and political conditions in countries where we operate, particularly in
emerging markets.
We may be subject to greenhouse gas regulations.
Additional changes to on-highway emissions or performance standards as well as complying with additional
environmental and safety requirements would add to the cost of our products and increase the capital-intensive
nature of our business. In that regard, we have been closely monitoring regulatory proposals intended to address
greenhouse gas emissions from vehicles and facilities. These regulatory proposals may have an impact on both
our facilities and our products. The scope of the impact of any greenhouse gas emissions regulatory program is
still uncertain and we are, therefore, unable to predict the impact to our operations.
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply
shortages.
We obtain materials and manufactured components from third-party suppliers. Some of our suppliers are the sole
source for a particular supply item. Any delay in receiving supplies could impair our ability to deliver products to
our customers and, accordingly, could have a material adverse effect on our business, financial condition, results
of operations, and cash flows. The volatility in the financial markets and uncertainty in the automotive sector
could result in exposure related to the financial viability of certain of our key third-party suppliers. In response to
financial pressures, suppliers may also exit certain business lines, or change the terms on which they are willing
to provide products. In addition, many of our suppliers have unionized workforces which could be subject to
work stoppages as a result of labor relations issues.
13
The markets in which we compete are subject to considerable cyclicality.
Our ability to be profitable depends in part on the varying conditions in the truck, bus, mid-range diesel engine,
and service parts markets, which are subject to cycles in the overall business environment and are particularly
sensitive to the industrial sector, which generates a significant portion of the freight tonnage hauled. Truck and
engine demand is also dependent on general economic conditions, interest rate levels and fuel costs, among other
external factors.
Our Truck, Engine and Parts segments are heavily influenced by the overall performance of the medium and
heavy truck retail markets within the U.S. and Canada (our “traditional” market), which consists of vehicles in
weight classes 6 through 8, including school buses. The “traditional” market is typically cyclical in nature and
cycles can span several years. The continuing worldwide economic uncertainty has adversely impacted the
industry and the market demand for our products remains stagnant with volumes at historically low levels. Every
part of our business, excluding sales to the U.S. military, has been adversely affected by the global recession
during 2010 and 2009. The “traditional” truck industry retail deliveries were 191,300 units, 174,400 units, and
236,600 units in 2010, 2009, and 2008, respectively. We expect 2011 industry volumes to be in the range of
230,000 units to 250,000 units.
We operate in the highly competitive North American truck market.
The North American truck market in which we operate is highly competitive. Our major U.S. domestic
competitors include: PACCAR and Ford. The competing foreign-controlled domestic manufacturers include:
Freightliner and Western Star (both subsidiaries of Mercedes Benz), and Volvo and Mack (both subsidiaries of
Volvo Global Trucks). The major U.S. military vehicle competitors include: BAE Systems, Force Protection Inc,
General Dynamics Land Systems, General Purpose Vehicles, Oshkosh Truck, and Protected Vehicles
Incorporated. In addition, smaller, foreign-controlled and market participants such as Isuzu, UD Trucks (formerly
known as Nissan North America, Inc.), Hino (a subsidiary of Toyota), and Mitsubishi are competing in the U.S.
and Canadian markets with primarily imported products. In Mexico, the major domestic competitors are Kenmex
(a subsidiary of PACCAR) and Mercedes Benz.
The intensity of this competition, which is expected to continue, results in price discounting and margin pressures
throughout the industry and adversely affects our ability to increase or maintain vehicle prices. Many of our
competitors have greater financial resources, which may place us at a competitive disadvantage in responding to
substantial industry changes, such as changes in governmental regulations that require major additional capital
expenditures. In addition, certain of our competitors may have lower overall labor costs.
We could incur restructuring and impairment charges as we continue to evaluate opportunities to restructure
our business and rationalize our manufacturing operations in an effort to optimize the cost structure.
We continue to evaluate opportunities to restructure our business and rationalize our manufacturing operations in
an effort to optimize the cost structure which could include, among other actions, additional rationalization of our
manufacturing operations (including, without limitation, our Chatham manufacturing operations). These actions
could result in significant charges which could adversely affect our financial condition and results of operations.
Future actions could result in restructuring and related charges, including but not limited to impairments,
employee termination costs and charges for pension and other post retirement contractual benefits and pension
curtailments that could be significant. We have substantial amounts of long-lived assets, including goodwill and
intangible assets, which are subject to periodic impairment analysis and review. Identifying and assessing
whether impairment indicators exist, or if events or changes in circumstances have occurred, including market
conditions, operating results, competition and general economic conditions, requires significant judgment. A
result of any of the above future actions could result in charges that could have an adverse effect on our financial
condition and results of operations.
14
We may discover defects in vehicles potentially resulting in delays in new model launches, recall campaigns,
or increased warranty costs.
Meeting or exceeding many government-mandated safety standards is costly and often technologically
challenging, especially where one or more government-mandated standards may conflict. Government safety
standards require manufacturers to remedy defects related to motor vehicle safety through safety recall
campaigns, and a manufacturer is obligated to recall vehicles if it determines that they do not comply with a
safety standard. Should we or government safety regulators determine that a safety or other defect or
noncompliance exists with respect to certain of our vehicles, there could be a delay in the launch of a new model
or a significant increase in warranty claims, the costs of which could be substantial.
We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of
the Sarbanes-Oxley Act of 2002.
Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal
control over financial reporting. As is further described in Item 9A, Controls and Procedures, we concluded that
we have no material weaknesses in our internal control over financial reporting as of October 31, 2010. Although
we consistently review and evaluate our internal control systems to allow management to report on, and our
independent auditors to attest to, the sufficiency of our internal control over financial reporting, we cannot assure
you that we will not discover material weaknesses in our internal control over financial reporting in the future.
Any such material weaknesses could adversely affect investor confidence in the Company and we could be
unable to provide timely and reliable financial information.
Our ability to use net operating loss (“NOL”) carryovers to reduce future tax payments could be negatively
impacted if there is a change in our ownership or a failure to generate sufficient taxable income.
Presently, there is no annual limitation on our ability to use U.S. federal NOLs to reduce future income taxes.
However, if an ownership change as defined in Section 382 of the Internal Revenue Code of 1986, as amended,
occurs with respect to our capital stock, our ability to use NOLs would be limited to specific annual amounts.
Generally, an ownership change occurs if certain persons or groups increase their aggregate ownership by more
than 50 percentage points of our total capital stock in a three-year period. If an ownership change occurs, our
ability to use domestic NOLs to reduce taxable income is generally limited to an annual amount based on the fair
market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt
interest rate. NOLs that exceed the Section 382 limitation in any year continue to be allowed as carry forwards
for the remainder of the 20-year carry forward period and can be used to offset taxable income for years within
the carryover period subject to the limitation in each year. Our use of new NOLs arising after the date of an
ownership change would not be affected. If more than a 50% ownership change were to occur, use of our NOLs
to reduce payments of federal taxable income may be deferred to later years within the 20-year carryover period;
however, if the carryover period for any loss year expires, the use of the remaining NOLs for the loss year will be
prohibited. If we should fail to generate a sufficient level of taxable income prior to the expiration of the NOL
carry forward periods, then we will lose the ability to apply the NOLs as offsets to future taxable income.
Our business may be adversely impacted by work stoppages and other labor relations matters.
We are subject to risk of work stoppages and other labor relations matters because a significant portion of our
workforce is unionized. As of October 31, 2010, approximately 57% of our hourly workers and 8% of our
salaried workers are represented by labor unions and are covered by collective bargaining agreements. Many of
these agreements include provisions that limit our ability to realize cost savings from restructuring initiatives
such as plant closings and reductions in workforce. Our current collective bargaining agreement with the UAW
will expire in October 2014. Any strikes, threats of strikes, or other resistance in connection with the negotiation
of new labor agreements or otherwise could materially adversely affect our business as well as impair our ability
to implement further measures to reduce structural costs and improve production efficiencies. A lengthy strike
15
that involves a significant portion of our manufacturing facilities could have a material adverse effect on our
financial condition, results of operations, and cash flows. For additional information regarding our collective
bargaining agreements, see Item 1, Business.
We are involved in pending litigation and an adverse resolution of such litigation may adversely affect our
business, financial condition, results of operations and cash flows.
Litigation can be expensive, lengthy, and disruptive to normal business operations. The results of complex legal
proceedings are often uncertain and difficult to predict. An unfavorable outcome of a particular matter described
in our periodic filings or any future legal proceedings could have a material adverse effect on our business,
financial condition, results of operations or cash flows. For additional information regarding certain lawsuits in
which we are involved, see Item 3, Legal Proceedings, and Note 17, Commitments and contingencies, to the
accompanying consolidated financial statements.
Item 1B. Unresolved Staff Comments
We have received no written comments regarding our periodic or current reports from the staff of the SEC that
were issued 180 days or more preceding the end of 2010 that remain unresolved.
Item 2.
Properties
In North America, we operate eighteen manufacturing and assembly facilities, which contain in the aggregate
approximately 14 million square feet of floor space. Of these eighteen facilities, fourteen are owned and four are
subject to leases. Twelve plants manufacture and assemble trucks, buses, and chassis, while six plants are used to
build engines. Of these six plants, three manufacture diesel engines, one manufactures fuel injectors, one
manufactures grey iron castings, and one manufactures ductile iron castings.
The principal product development and engineering facility for our Truck segment is currently located in Fort
Wayne, Indiana. For our Engine segment, our principal product development and engineering facilities are
located in Melrose Park, Illinois and Columbia, South Carolina. The Parts segment has eight distribution centers
in the U.S., two in Canada, and one in Mexico.
In addition, we own or lease other significant properties in the U.S. and Canada including vehicle and parts
distribution centers, sales offices, two engineering centers (which serve our Truck and Engine segments), and our
headquarters which is currently located in Warrenville, Illinois. In addition, we own and operate manufacturing
plants in both Brazil and Argentina, which contain a total of 1 million square feet of floor space for use by our
South American engine subsidiaries.
A majority of the activity of the Financial Services segment is conducted from leased headquarters in
Schaumburg, Illinois. The Financial Services segment also leases an office in Mexico.
All of the above facilities are being utilized with the exception of the Chatham, Ontario plant, which is currently
not operating due to low order volumes. Not included above is the former Indianapolis, Indiana Engine Plant
(“IEP”), which ceased business activities in 2009 and for which no further activity is planned.
On November 30, 2010, we purchased a 1.2 million square foot office campus in Lisle, Illinois, which we intend
to develop into our future headquarters as well as a research and technical center.
We believe that all of our facilities have been adequately maintained, are in good operating condition, and are
suitable for our current needs. These facilities, together with planned capital expenditures, are expected to meet
our needs in the foreseeable future.
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Item 3.
Legal Proceedings
Overview
We 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 our business. The majority of these claims
and proceedings relate to commercial, product liability, and warranty matters. 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, and cash flows.
Litigation Relating to Accounting Controls and Financial Restatement
In December 2007, a complaint was filed against us by Norfolk County Retirement System and Brockton
Contributory Retirement System (collectively “Norfolk”), which was subsequently amended in May 2008. In
March 2008, an additional complaint was filed by Richard Garza (“Garza”), which was subsequently amended in
October 2009. Both of these matters were filed in the United States District Court, Northern District of Illinois.
The plaintiffs in the Norfolk case allege they are shareholders suing on behalf of themselves and a class of other
shareholders who purchased shares of our common stock between February 14, 2003 and July 17, 2006. The
amended complaint alleges that the defendants, which include the Company, one of its executive officers, two of
its former executive officers, and the Company’s former independent accountants, Deloitte & Touche LLP
(“Deloitte”), violated federal securities laws by making false and misleading statements about the Company’s
financial condition during that period. In March 2008, the court appointed Norfolk County Retirement System
and the Plumbers Local Union 519 Pension Trust as joint lead plaintiffs. On July 7, 2008, the Company filed a
motion to dismiss the amended complaint based on the plaintiffs’ failure to plead any facts tending to show the
defendants’ actual knowledge of the alleged false statements or that the plaintiffs suffered damages. Deloitte also
filed a motion to dismiss on similar grounds. On July 28, 2009, the Court granted Deloitte’s motion to dismiss
but denied the motion to dismiss as to all other defendants. The parties then engaged in discovery focused on
class certification issues. As reported to the Court on November 4, 2010, the parties have entered into a tentative
settlement to resolve the matter. Pursuant to the proposed settlement, the Company has agreed to cause $13
million to be paid to a settlement fund and, in return, plaintiffs would dismiss the lawsuit with prejudice and
provide a release of all claims that relate in any manner to the allegations, facts or any other matter whatsoever
set forth in or otherwise related, directly or indirectly to the allegations in the complaint. The proposed settlement
agreement will also contain, among other provisions, a statement that each of the defendants has denied and
continues to deny having committed or intended to commit any violations of law or any wrongdoing whatsoever,
that each of the defendants does not make any admission of liability, and that defendants are entering into
the settlement solely because it would eliminate the burden, risk and expense of further litigation and would fully
and finally resolve all of the claims released by plaintiffs. Before the settlement becomes final, the proposed
settlement must be finally approved by the Court. The Company also reached an agreement with the insurer
under its directors’ and officers’ insurance policy that includes a provision for the insurer to reimburse the
Company for settlement costs attributable to the defendant directors and officers.
The plaintiff in the Garza case brought a derivative claim on behalf of the Company against one of the
Company’s executive officers, two of its former executive officers, and certain of its directors, alleging that all of
the defendants violated their fiduciary obligations under Delaware law by willfully ignoring certain accounting
and financial reporting problems at the Company, thereby knowingly disseminating false and misleading
financial information about the Company and certain of the defendants were unjustly enriched in connection with
their sale of Company stock during the December 2002 to January 2006 period. On November 30, 2009, the
defendants filed a motion to dismiss the amended complaint based on plaintiff’s failure to state a claim and based
on plaintiff’s failure to make a demand on the Board of Directors. On August 20, 2010, the Court entered an
order granting defendants’ motion to dismiss the amended complaint based on plaintiff’s failure to make a
demand on the Board of Directors. On August 26, 2010, the Company received from plaintiff a letter demanding
17
that the Board of Directors investigate the matters alleged in the plaintiff’s amended complaint. After plaintiff
advised the Court that he did not intend to seek leave to file a second amended complaint, the Court entered final
judgment of dismissal on September 15, 2010.
Retiree Health Care Litigation
In April 2010, the UAW and others (“Plaintiffs”) filed a “Motion of Plaintiffs Art Shy, UAW, et al for an
Injunction to Compel Compliance with the Settlement Agreement” (the “Shy Motion”). The Shy Motion is
pending in U.S. District Court for the Southern District of Ohio (the “Court”). The Shy Motion seeks to enjoin
the Company from implementing an administrative change relating to prescription drug benefits under a
healthcare plan for Medicare eligible retirees (the “Part D Change”). Specifically, Plaintiffs claim that the Part D
Change violates the terms of a June 1993 settlement agreement previously approved by the Court (the
“Settlement Agreement”). That Settlement Agreement resolved a class action originally filed in 1992 regarding
the restructuring of the Company’s then applicable retiree health care and life insurance benefits.
The Part D Change was effective July 1, 2010, and made the Company’s prescription drug coverage for post-65
retirees (“Plan 2” or Medicare-eligible retirees) supplemental to the coverage provided by Medicare. Plan 2
retirees now pay the premiums for Medicare Part D drug coverage. For drugs that are covered by Medicare
Part D, Plan 2 supplements that coverage through a “buy down” of co-payments to the amounts in place prior to
the Part D Change.
In May 2010, the Company filed its Opposition to the Shy Motion (the “Opposition”).
In June 2010, Navistar filed a separate Complaint in the Court relating to the Settlement Agreement (the
“Complaint”). In the Complaint, the Company argues that it has not received the consideration that it was
promised in the Settlement Agreement – specifically, that the Company’s APBO for health benefits would be
“permanently reduced” to approximately $1 billion. The Company, therefore, seeks a declaration from the Court
that it is not required to fund or provide retiree health benefits that would cause its APBO to exceed the
approximate $1 billion amount provided in the Settlement Agreement.
FATMA Notice
International Indústria de Motores da América do Sul Ltda. (“IIAA”) formerly known as Maxion International
Motores S/A (“Maxion”), a wholly owned subsidiary of the Company, received a notice on July 15, 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 US$1.2 million at
October 31, 2010), 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 on August 3, 2010 and
has not yet received a decision following that appearance. IIAA disputes the allegations in the notice and intends
to vigorously defend itself.
6.0 Liter Diesel Engine Litigation
In November 2010, Brandon Burns filed a putative class action lawsuit against Navistar, Inc. and Ford in federal
court for the Southern District of California (the “Burns Action”). The Burns Action seeks to certify a class of
California owners and lessees of model year 2003-07 Ford vehicles powered by the 6.0L Power Stroke® engine
that Navistar, Inc. previously supplied to Ford. Burns alleges that the engines in question have design and
manufacturing defects. The theories of liability asserted against Navistar are negligent performance of
contractual duty (related to Navistar’s former contract with Ford), unfair competition, and unjust enrichment. For
18
relief, the Burns Action seeks dollar damages sufficient to remedy the alleged defects, compensate the alleged
damages incurred by the proposed class, and compensate plaintiffs’ counsel. The Burns Action also asks the
Court to award punitive damages and restitution/disgorgement.
Since the filing of the Burns Action, four additional putative class action lawsuits have been filed in federal
courts by the same plaintiff’s attorney representing Mr. Burns in the Burns Action (the “Additional Actions”).
The Additional Actions seek to certify in Utah, Arkansas, Tennessee, and Mississippi, classes similar to the
proposed California class in the Burns Action. Navistar has not yet been served in the Mississippi case, but has
obtained a copy of the complaint. The theories of liability and relief sought in the Additional Actions are
substantially similar to the Burns Action.
We have also been made aware of the Kruse Technology Partnership vs. Ford Motor Company, lawsuit filed
against Ford regarding potential patent infringement of three patents in the United States District Court for the
Central District of California. An amended complaint against Ford was filed by Kruse in August 2010. The
amended complaint alleges that Ford has infringed the patents by sale or use of engines, such as the Power Stroke
diesel engines. The general subject matter of the patents is pilot injection of fuel in the combustion
cycle. Navistar formerly supplied Power Stroke diesel engines to Ford, although today Ford manufactures its own
Power Stroke engines. In the Ford Navistar Settlement Agreement of January 9, 2009, Navistar agreed to
indemnify Ford for claims of infringement based upon Ford’s manufacture, sale or use of the 6.0 and 6.4 liter
Power Stroke engines sold by Navistar to Ford. Ford has not requested Navistar to defend Ford at this time.
Lis Franco de Toledo, et. al. vs. Syntex do Brasil and MWM
In 1973 Syntex do Brasil Industria e Comercio Ltda. (“Syntex”), a predecessor of our Brazilian engine
manufacturing subsidiary now known as MWM International Industria de Motores da America do Sul Ltda
(“MWM”), filed a lawsuit against Dr. Lis Franco de Toledo and others (collectively, “Lis Franco”). Syntex
claimed Lis Franco had improperly terminated a contract which provided for the transfer from Lis Franco to
Syntex of a patent for the production of a certain vaccine. Lis Franco filed a counterclaim, alleging that he was
entitled to royalties under the contract. In 1975, the Brazilian trial court ruled in favor of Lis Franco, a decision
which was affirmed on appeal in 1976. In 1984, while the case was still pending, Syntex’ owner, Syntex
Comercio e Participacoes Ltds (“Syntex Parent”) sold the stock of Syntex to the entity now known as MWM, and
in connection with that sale Syntex Parent agreed to indemnify and hold harmless MWM for any and all
liabilities of Syntex, including its prior pharmaceutical operations (which had been previously spun-off to
another subsidiary wholly-owned by the Syntex parent) and any payments that might be payable under the Lis
Franco lawsuit. In the mid to late 1990s, Syntex Parent was merged with an entity now known as Wyeth
Industrica Farmaceutica Ltds (“Wyeth”).
In 1999, Lis Franco amended its pleadings to add MWM to the lawsuit as a defendant. In 2000, Wyeth
acknowledged to the Brazilian court its sole responsibility for amounts due in the Lis Franco lawsuit and MWM
asked the court to be dismissed from that action. The judge denied that request. MWM appealed and lost.
In his pleadings, Lis Franco alleges that the royalties payable to him were approximately R$42 million. MWM
believed the appropriate amount payable is approximately R$16 million. In December 2009, the court appointed
expert responsible for the preparation of the royalty calculation filed a report with the court indicating royalty
damages of R$68 million. MWM challenged the expert’s calculation. In August 2010, the court asked the parties
to consider the appointment of a new expert. MWM agreed with this request but Lis Franco objected and, in
December 2010, the court accepted and ratified the expert’s calculation as of May 30, 2010 in the amount of
R$74 million (the equivalent of approximately US$43.5 million at October 31, 2010) and entered judgment
against MWM. We believe this calculation is incorrect and intend to appeal the decision. In May 2010,
MWM filed a lawsuit against Wyeth, seeking recognition that Wyeth is liable for any and all liabilities, costs,
expenses and payments related to the Lis Franco lawsuit.
19
Abestos and Environmental Matters
Along with other vehicle manufacturers, we have been subject to an increase in the 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 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. 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. We have also 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.
Item 4.
[Removed and Reserved]
20
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
PART II
Equity Securities
Market Information
Our common stock is listed on the New York Stock Exchange (“NYSE”), under the stock symbol “NAV.” The
following is the high and low market price per share of our common stock from NYSE for each quarter of 2010
and 2009:
Year Ended October 31, 2010
High
Low
Year Ended October 31, 2009
High
Low
1st Qtr . . . . . . . . . . . . . . . . . . . . .
2nd Qtr . . . . . . . . . . . . . . . . . . . . .
3rd Qtr . . . . . . . . . . . . . . . . . . . . .
4th Qtr . . . . . . . . . . . . . . . . . . . . .
$
41.52
52.43
58.00
53.83
$
31.53
36.79
44.00
40.58
1st Qtr . . . . . . . . . . . . . . . . . . .
2nd Qtr . . . . . . . . . . . . . . . . . . .
3rd Qtr . . . . . . . . . . . . . . . . . . .
4th Qtr . . . . . . . . . . . . . . . . . . .
$
33.34
38.10
48.94
48.26
$
15.24
22.25
35.84
31.71
Number of Holders
As of November 30, 2010, there were approximately 12,792 holders of record of our common stock.
Dividend Policy
Holders of our common stock are entitled to receive dividends when and as declared by the Board of Directors
out of funds legally available therefore, provided that, so long as any shares of our 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
our 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 year in which the
dividend is declared or the preceding year, and no dividend may be paid on common stock at any time during
which the capital of outstanding preferred stock or preference stock exceeds our net assets.
Payments of cash dividends and the repurchase of common stock are currently limited due to restrictions
contained in our debt agreements. We have not paid dividends on our common stock since 1980 and do not
expect to pay cash dividends on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
Our directors who are not employees receive an annual retainer and meeting fees payable at their election either
in shares of our common stock or in cash. A director may also elect to defer any portion of such compensation
until a later date. Each such election is made prior to December 31st for the next succeeding calendar year. On
June 15, 2010, the Board of Directors, upon recommendation from the Nominating and Governance Committee
approved changes to the non-employee director’s compensation that in effect mandated on a going forward basis
that at least 18.75% ($15,000) of the annual retainer be paid in the form of shares of our common stock.
Previously, the Board of Directors mandated that at least one-fourth of the annual retainer be paid in the form of
shares of our common stock. During the fourth quarter ended October 31, 2010, one director elected to defer
annual retainer and/or meeting fees in shares, and was credited with an aggregate of 712.318 deferred stock units
(each such stock unit corresponding to one share of common stock) at prices ranging from $43.91 to $49.195.
These stock units were issued to our director without registration under the Securities Act, in reliance on
Section 4(2) based on the directors’ financial sophistication and knowledge of the company.
Issuer Purchases of Equity Securities
There were no purchases of our equity securities by us or our affiliates during the fourth quarter ended
October 31, 2010.
21
Item 6.
Selected Financial Data
Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and
the notes to the accompanying consolidated financial statements for additional information regarding the
financial data presented below, including matters that might cause this data not to be indicative of our future
financial condition or results of operations.
We operate in four industry segments: Truck, Engine, Parts, and Financial Services. A detailed description of our
segments, products, and services, as well as additional selected financial data is included in “Our Operating
Segments” in Item 1, Business, and in Note 18, Segment reporting, to the accompanying consolidated financial
statements.
Five-Year Summary of Selected Financial and Statistical Data
As of and for the Years Ended October 31,
2010
2009
2008
2007
2006
(in millions, except per share data)
RESULTS OF OPERATIONS DATA
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . . . . $
Income (loss) before extraordinary gain . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to non-controlling
interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to Navistar
12,145 $
11,569 $
14,724 $
12,295 $
14,200
267
—
267
44
322
23
345
25
134
—
134
—
(120)
—
(120)
—
301
—
301
—
International Corporation . . . . . . . . . . . . . . . . . . . . $
223 $
320 $
134 $
(120) $
301
Basic earnings (loss) per share:
Income (loss) attributable to Navistar
International Corporation before
extraordinary gain . . . . . . . . . . . . . . . . . . . . . $
Extraordinary gain, net of tax . . . . . . . . . . . . . . .
Net income (loss) attributable to Navistar
3.11 $
—
4.18 $
0.33
1.89 $
—
(1.70) $
—
4.29
—
International Corporation . . . . . . . . . . . . . . . . $
3.11 $
4.51 $
1.89 $
(1.70) $
4.29
Diluted earnings (loss) per share:
Income (loss) attributable to Navistar
International Corporation before
extraordinary gain . . . . . . . . . . . . . . . . . . . . . $
Extraordinary gain, net of tax . . . . . . . . . . . . . . .
Net income (loss) attributable to Navistar
3.05 $
—
4.14 $
0.32
1.82 $
—
(1.70) $
—
4.12
—
International Corporation . . . . . . . . . . . . . . . . $
3.05 $
4.46 $
1.82 $
(1.70) $
4.12
Weighted average number of shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71.7
73.2
71.0
71.8
70.7
73.2
70.3
70.3
70.3
74.5
BALANCE SHEET DATA
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Long-term debt:(A)
Manufacturing operations . . . . . . . . . . . . . . . . .
Financial services operations . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . $
9,730 $
10,028 $
10,390 $
11,448 $
12,830
1,841
2,397
4,238 $
1,670
2,486
1,639
3,770
1,665
4,418
4,156 $
5,409 $
6,083 $
1,946
4,809
6,755
—
Redeemable equity securities . . . . . . . . . . . . . . . . . . .
8
13
143
140
(A) Exclusive of current portion of long-term debt.
22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is
designed to provide information that is supplemental to, and should be read together with, our consolidated
financial statements and the accompanying notes. Information in MD&A is intended to assist the reader in
obtaining an understanding of our consolidated financial statements, the changes in certain key items within
those financial statements from year-to-year, the primary factors that accounted for those changes, any known
trends or uncertainties that we are aware of that may have a material effect on our future performance, as well as
how certain accounting principles affect the Company’s consolidated financial statements. In addition, MD&A
provides information about our business segments and how the results of those segments impact our financial
condition and results of operations as a whole.
Executive Summary
For 2010, we recognized $223 million of net income attributable to Navistar International Corporation in spite of
continued industry volume lows. Contributing to our profitability were sales of military vehicles, stable market
share of our commercial products, an increase in Engine segment sales in South America, lower manufacturing
and material costs, and improved operating efficiencies. Our performance was further driven by increased
commercial sales within North America for our Parts segment and improved results of our Financial Services
segment.
During 2010, we remained profitable despite continued industry volume lows within our U.S and Canada School
bus and Class 6 through 8 medium and heavy truck (“traditional”) markets. As the U.S. and global markets
continue their recovery from the recession, we believe there will be a continued gradual increase in industry units
in 2011 compared to the depressed volumes of 191,300 in 2010 and 174,400 in 2009. Building off a slight
pre-buy in early 2010 related to the new 2010 EPA emissions requirements, we further benefited from increases
in “traditional” industry units throughout the year, which coupled with increases in our “expansionary” business
and our continued strong market share performance, drove volume growth for 2010. In addition, U.S. military
orders for MRAP vehicles, which have higher associated revenue per unit, positively impacted our 2010
performance. We expect the “traditional” truck industry retail deliveries to be in the range of 230,000 units to
250,000 units for 2011.
We continue to invest in research, development, and tooling equipment to design and produce our engine product
lines to meet EPA emissions requirements. We have chosen advanced EGR, combined with other strategies, as
our solution to meet the 2010 emissions requirements. We believe coupling EGR with other emissions strategies
gives our products advantages over our competitors’ liquid-based urea SCR solution and enables us to maintain
flexibility in meeting emissions requirements. We continue to evaluate our emissions strategies on a
platform-by-platform basis to achieve the best long-term solution for our customers in each of our vehicle
applications. Our continued investment in research and development includes the further enhancement of our
advanced EGR technology and the ongoing development of reliable, high-quality, high-performance, and fuel-
efficient products.
Building on our 2009 actions to adjust our capital structure, our Financial Services segment continued to address
future liquidity needs throughout 2010. In addition to various refinancing and securitization actions made during
the year, we entered into a three-year operating agreement with GE Capital Corporation and GE Capital
Commercial, Inc. (collectively “GE”) whereby GE became our preferred source of retail customer financing for
equipment offered by us and our dealers in the U.S. We also amended the terms of our wholesale trust
agreement, which resulted in the consolidation of the Master Trust.
Business Outlook and Key Trends
For our Truck segment, we expect benefits from further improvements in our “traditional” volumes as the
industry continues to increase from the lows experienced in 2010 and 2009. In the U.S. market, the average age
of the truck fleet of 6.7 years in 2010 was the highest since 1979, according to ACT Research, and we anticipate
23
higher sales in 2011 for truck replacement as our customers refresh aging fleets. We also expect demand for
trucks to increase as freight rates and volumes continue to improve as the economy recovers. In addition to
increased demand, we expect to further benefit from improved revenues and margins associated with our 2010
emissions-compliant products. In October 2010, our UAW represented employees ratified a new four-year labor
agreement that provides us additional flexibility in manufacturing decisions and included provisions that allow
for the wind-down of UAW positions at our Fort Wayne facility. In the future, we expect to realize benefits from
this contract, as well as our other plant optimization actions taken during the trough of the truck cycle. Finally,
we anticipate positive contributions from business acquisitions and investments also made during this period.
Within our Engine segment, we expect our South American operations to continue to be a key contributor to
overall sales and profitability. As markets continue to improve in North America, we anticipate further increases
in our intercompany sales to our Truck segment, driven by sales of our MaxxForce 11 and 13 engines and the
upcoming launch of our MaxxForce 15 engine, as well as additional OEM sales for commercial, consumer, and
specialty vehicle products. Beginning in 2010, MaxxForce engines were used in the entire North America vehicle
offering of our Truck segment as compared to outside sourcing for various model engines in prior years. We have
made investments in engineering and product development for our 2010 emissions-compliant engines and we
expect to continue to make significant investments in attaining the 0.2 nitrogen oxide (“NOx”) emissions levels,
as well as for other product innovations, cost reductions, and fuel-usage efficiencies.
As freight rates and volumes increase in conjunction with the economic recovery, we expect our Parts segment
volumes will continue to improve within our commercial markets in the U.S. and Canada. In addition, we
anticipate incremental Parts sales as the overall age of the U.S. truck fleet continues to rise as well as Parts sales
driven by the fulfillment of additional military orders. While we also expect improvements within our global
markets, we will experience Rest of World (“ROW”) reported sales declines in 2011 and beyond as sales in
certain markets are transitioned to our NC2 joint venture.
Certain trends have affected our results of operations for 2010 as compared to 2009 and 2008. In addition, we
expect that certain key trends will impact our future results of operations. Some of these factors are as follows:
•
•
“Traditional” Truck Market—The “traditional” truck markets in which we compete are typically cyclical in
nature and are strongly influenced by macro-economic factors such as industrial production, demand for
durable goods, capital spending, oil prices and consumer confidence.
Global Economy—The global economy, and in particular the economies in the U.S. and Brazil markets, are
showing signs of recovery, and the related financial markets have stabilized. The impact of the economic
recession and financial turmoil on the global markets pose a continued risk as customers may postpone
spending in response to tighter credit, negative financial news and/or declines in income or asset values.
Lower demand for our customers’ products or services could also have a material negative effect on the
demand for our products. In addition, there could be exposure related to the financial viability of certain key
third-party suppliers, some of which are our sole source for particular components. Lower expectations of
growth and profitability have resulted in impairments of long-lived assets in the past and we could continue
to experience pressure on the carrying values of our assets if conditions persist for an extended period of
time.
• Military Sales—In 2010, we continued to leverage existing products and plants to meet the urgent demand
of the U.S. military and our North Atlantic Treaty Organization (“NATO”) allies. Our U.S. military sales
were $1.8 billion, $2.8 billion, and $3.9 billion in 2010, 2009, and 2008, respectively, and consisted of
MRAP vehicles, lower-cost militarized commercial trucks to the U.S. and NATO allies, and sales of parts
and services to the U.S. military. In the first quarter of 2009, we completed delivery of all remaining 2008
MRAP orders to the U.S. military. In 2010, we received additional orders for MRAPs and completed
delivery in the third quarter. In November 2010, we received an order for 250 MRAP recovery vehicles and
in December 2010, we received an order for 175 MRAP Dash vehicles. We expect these units to be
delivered in 2011. We continue to expect that over the long term our military business will generate
approximately $1.5 billion to $2 billion in annual sales.
24
• Worldwide Engine Unit Sales—Our worldwide engine unit sales are impacted primarily by North America
truck demand and sales in South America, our largest engine market outside of the North American market.
These markets are impacted by consumer demand for products that use our engines as well as macro-
economic factors such as oil prices and construction activity. Our worldwide engine unit sales were 240,400
units in 2010, 269,300 units in 2009, and 345,500 units in 2008. In 2009, we settled our legal dispute with
Ford and continued our North American supply agreement for diesel engines with Ford through
December 31, 2009. As a result, our 2010 North American unit sales to Ford were 24,900 units as compared
to 101,500 units and 124,500 units for 2009 and 2008, respectively. We expect our 2011 worldwide engine
unit sales to be primarily to our Truck segment in North America and to external customers in South
America.
•
2010 Emissions Standards Technology—We have chosen advanced EGR, combined with other
technologies, as our solution to meet the 2010 emissions standards. We believe coupling EGR with other
emissions strategies gives our products advantages over our competitors’ liquid-based urea SCR solution
and enables us to maintain flexibility in meeting emission requirements. Our 2010 emissions strategy places
the burden and responsibility of meeting the 2010 emissions standards on the Company versus our
competitors’ liquid-based urea SCR solution that places that burden on the customer. We believe that our
customer-friendly solution provides our products with a significant competitive advantage in North
America, because most truck and engine manufacturers have chosen liquid-based urea SCR as the solution
to meet 2010 emission standards. In 2010, all of our MaxxForce engines were certified to be compliant with
2010 emissions standards through the use of credits and 0.5 NOx emissions. We continue to evaluate our
emissions strategies on a platform-by-platform basis to achieve the best long-term solution for our
customers in each of our vehicle applications. Our continued investment in research and development
includes the further enhancement of our advanced EGR technology to reach 0.2 NOx emissions as well as
the ongoing development of reliable, high-quality, high-performance, and fuel-efficient products.
• Warranty Costs—We launched our 2010 emissions-compliant engines during 2010. Emissions regulations
in the U.S. and Canada have resulted in rapid product development cycles, driving significant changes from
previous engine models. Historically warranty experience for launch-year engines has been higher compared
to the prior model-year engines; however, over time we are able to refine both the design and manufacturing
process to reduce both the volume and the severity of warranty claims. We have made substantial
investments of engineering, product development, and testing within our 2010 emissions-compliant engines
to mitigate some of the warranty exposure. While we believe warranty costs per unit for 2010 emissions-
compliant engines will be somewhat higher compared to pre-2010 emissions-compliant engines, we believe
that our actions will result in reduced exposure compared to previous launches. Also contributing to the
expectation of higher warranty costs in 2011 is the use of all MaxxForce engines in our North America
product offering compared to previous outside sourcing for various engine models in which warranty costs
were included in the engine purchase price.
•
•
13 Liter / 15 Liter Engine Strategy—In conjunction with our EGR strategy for compliance with the 2010
emissions standards, we only offer vehicles equipped with MaxxForce engines in the U.S. and Canada. For
our Class 8 heavy and severe service lines, we offer our MaxxForce 11 and 13 liter engines, and will launch
our MaxxForce 15 engine in 2011. The Company has taken significant strides to demonstrate to our
customers that, in many applications, our MaxxForce 13 provides sufficient horsepower and torque. In
addition to the same or greater performance as a 15 liter engine, our MaxxForce 13 has lower cost, increased
fuel economy, and reduced weight.
Changes in Capital Structure—In October 2009, we completed the sale of $1.0 billion aggregate principal
amount of 8.25% Senior Notes due 2021 (the “Senior Notes”) and $570 million aggregate principal amount
of 3.0% Senior Subordinated Convertible Notes due 2014 (the “Convertible Notes”). The proceeds were
used to repay all amounts outstanding under the $1.5 billion loan facility due in 2012. The impact of issuing
the new debt increased our interest expense in 2010 as compared to 2009. The convertible debt will impact
our calculation of diluted earnings per share when our average stock price exceeds $50.27 during the
reporting period. In December 2009, we refinanced NFC’s revolving credit facility with an $815 million
25
three-year facility, and concurrently completed a private retail asset securitization and a fixed rate secured
loan generating proceeds of $304 million. In addition, utilizing the U.S. Federal Reserve’s TALF program,
we completed the sale of $350 million of three-year investor notes in November 2009 and $250 million of
two-year investor notes in February 2010 within our wholesale note funding facility. In July 2010, we
amended the terms of our wholesale trust agreement, which resulted in the consolidation of the Master
Trust. As of July 31, 2010, effective with the amendment, Master Trust assets of approximately $550
million, net of intercompany eliminations and retained interests previously carried on our Consolidated
Balance Sheet, and liabilities of approximately $550 million, net of intercompany eliminations, were
consolidated into the assets and liabilities of the Company. Finally, we issued secured notes for $919 million
and $290 million in May 2010 and October 2010, respectively.
GE Capital Alliance—In March 2010, we entered into a three-year Operating Agreement with GE. Under
the terms of the agreement, GE became our preferred source of retail customer financing for equipment
offered by us and our dealers in the U.S. We provide GE a loss sharing arrangement for certain credit losses,
and under limited circumstances NFC retains the rights to originate retail customer financing. Loan
originations under the GE Operating Agreement began in the third quarter of 2010, which will continue to
reduce NFC originations and portfolio balances in the future. We expect retail finance receivables and retail
finance revenues to decline over the next five years as our retail portfolio pays down.
Changes in Credit Markets—Throughout 2010, the credit markets substantially stabilized and recovered but
remain volatile in response to general economic weakness and uncertainty. Credit spreads, which generally
represent the default risk component above the base interest rate that a lender charges its customer, remain
at historically high levels but are currently lower than the unprecedented levels seen at the end of 2008 and
early 2009. The higher credit spreads have been partially offset by lower base interest rates, which have
remained stable throughout 2010. The numerous recent financing transactions in both the private and public
markets, as well as our operating agreement with GE, demonstrate our ongoing access to liquidity. In
addition, our recent financing transactions have primarily been at fixed interest rates further mitigating our
exposure to future volatility in credit spreads.
Steel and Other Commodities—Commodity costs, which include steel, precious metals, resins, and
petroleum products, decreased by $49 million in 2010, and increased by $23 million and $97 million in
2009 and 2008, respectively, as compared to the corresponding prior years. We are able to mitigate the
effects of steel and other commodity cost increases through a combination of design changes, material
substitution, alternate supplier resourcing, global sourcing efforts, pricing performance, and hedging
activities. Although the terms of supplier contracts and special pricing arrangements can vary, a time lag
exists between when our suppliers incur increased costs and when these costs are passed on to us as well as
when we might recover them through increased pricing. This time lag can span several quarters depending
on the specific situation. More recent trends indicate the cost pressures from the majority of our steel and
commodity inputs have not only ceased, but have reversed. However, we continued to experience higher
commodity prices as compared to the overall industry decline as our prior actions to avoid the significant
price increases have resulted in temporarily having slightly higher costs than the industry. For 2011, we
anticipate increases in overall global commodity costs. However, we plan to enhance our actions to mitigate
exposure to commodity cost volatility by hedging a larger percentage of our anticipated commodity needs.
Customer and Transportation Industry Consolidations—Various transportation companies have been
acquired, merged to form combined operating entities, or ceased operations. Although we are unable to
determine the impact this industry consolidation will have with regard to future purchases or pricing of our
trucks, engines and parts, certain of these newly combined entities have enjoyed increased purchasing power
and contributed to lower demand for our products.
Facilities Optimization—We continue to seek further opportunities for manufacturing and operating
efficiencies within our facilities. In early 2010, we announced and implemented our plan to consolidate all
bus production within our Tulsa IC Bus facility. In September 2010, we announced our intention to
consolidate our executive management, certain business operations, and product development at a new
26
•
•
•
•
•
1.2 million square foot world headquarters site in Lisle, Illinois, as well as a testing and validation center to
be located within our Melrose Park facility. In October 2010, we completed certain tax-exempt bond
financings totaling $225 million to be used for the purposes of financing the relocation of our headquarters
and the development of certain industrial facilities, improvements, and equipment, and in November 2010,
we finalized the purchase of the property and buildings at the new world headquarters site. We continue to
develop plans for efficient transitions related to these activities and evaluate other options to continue the
optimization of our operations and management structure.
•
Joint Ventures and Other Investments—We continue to make substantial investments in joint ventures and
other businesses that are considered key growth opportunities to our core operations, as well as important
expansionary markets. Since inception, we have contributed approximately $141 million to our joint
ventures with Mahindra & Mahindra Ltd. and Caterpillar, which both recently launched new products. In
addition, we expect to finalize our joint ventures with JAC in 2011. The Company has also made recent
acquisitions that present opportunities to further vertically integrate our operations and our product offerings
including, Continental Mixer in 2010 and PPT and Monaco in 2009.
Results of Operations and Segment Results of Operations
The following table summarizes our Consolidated Statements of Operations and illustrates the key financial
indicators used to assess our consolidated financial results.
Results of Operations for 2010 as Compared to 2009
2010
2009
Change
%
Change
(in millions, except per share data and % change)
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12,145 $
11,569 $
576
5
Costs of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of property and equipment
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . .
Engineering and product development costs . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net
9,741
(15)
—
1,406
464
253
44
9,366
59
31
1,344
433
251
228
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in (loss) income of non-consolidated affiliates . . . . . . . . . . . . . .
11,805
(50)
11,256
46
Income before income tax and extraordinary gain . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to non-controlling interests . . . . . . . . . . .
290
23
267
—
267
44
359
37
322
23
345
25
Net income attributable to Navistar International Corporation . . . . . . . $
223 $
320 $
375
4
(74) N.M.
(100)
(31)
5
62
7
31
1
2
(81)
(184)
549
5
(96) N.M.
(69)
(14)
(55)
(23)
(78)
19
(97)
(19)
(38)
(17)
(100)
(23)
76
(30)
Diluted earnings per share:
Income attributable to Navistar International Corporation before
extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Navistar International Corporation . . . $
3.05 $
—
3.05 $
4.14 $ (1.09)
(0.32)
0.32
(26)
(100)
4.46 $ (1.42)
(32)
Not meaningful (“N.M.”)
27
Sales and revenues, net
Our sales and revenues, net are categorized by geographic region based on the location of the customer sale and the
point of revenue recognition. Sales and revenues, net by geographic region are as follows:
Total
U.S. and Canada
Rest of World (“ROW”)
2010
2009
Change
%
Change
2010
2009
Change
%
Change
2010
2009 Change
%
Change
(in millions,
except % change)
Truck . . . . . . . . . . . . . . $
Engine . . . . . . . . . . . . .
Parts . . . . . . . . . . . . . .
Financial Services . . . .
Corporate and
8,207 $
2,986
1,885
309
7,297 $
2,690
2,173
348
910
296
(288)
(39)
Eliminations . . . . . .
(1,242)
(939)
(303)
Total
. . . . . . . . . . . . . . $
12,145 $
11,569 $
576
12
11
(13)
(11)
32
5
$
7,393 $
1,611
1,718
254
6,807 $
1,836
2,038
268
586
(225)
(320)
(14)
9
(12)
(16)
(5)
$
814 $
1,375
167
55
490 $
854
135
80
324
521
32
(25)
(1,242)
(939)
(303)
32
—
—
—
$
9,734 $
10,010 $
(276)
(3)
$
2,411 $
1,559 $
852
66
61
24
(31)
—
55
Truck segment sales increased $910 million in 2010 compared to the prior year, reflecting improvements in our
commercial business and the benefits of a shift in product mix. Chargeouts of our “traditional” units were 6,400 units
higher, as compared to the prior year, with a greater mix of Class 8 heavy trucks contributing to higher overall revenue.
We experienced market share improvements in Class 6 and 7 medium and maintained strong market share in our other
“traditional” classes. Further contributing to the increase were improved ROW sales driven by the strengthening global
economy, as well as the impact of consolidating our BDT operations. Partially offsetting the increase in segment sales
was a 14% decrease within our defense business, primarily as a result of lower sales of higher revenue per unit military
vehicles driven by the timing of prior year deliveries to the U.S. military.
Engine segment sales increased $296 million compared to the prior year, primarily due to increased engine sales in
South America, the impact of consolidating our BDP operations, and increased intercompany activity. These increases
were partially offset by the expiration of our contract with Ford to supply diesel engines for their F-Series and E-Series
vehicles in the U.S. and Canada, resulting in a decrease of 76,600 units sold to Ford in 2010 as compared to the prior
year.
Parts segment sales decreased $288 million compared to the prior year, largely because of declines in U.S. military
sales which were the result of the fulfillment of higher military vehicle fielding orders in the prior year. Lower military
sales were partially offset by improvements in our commercial markets in the U.S as well as increased ROW sales.
Financial Services segment revenues decreased $39 million compared to the prior year, primarily reflecting declines in
average finance receivables of $362 million. The declines in average finance receivable balances represent the effect of
a reduction in loan originations due to the economic environment in the U.S. and Mexico markets in 2010, 2009, and
2008, as well as customer payments on existing balances and originations under the GE Operating Agreement.
Costs of products sold
Consistent with increased sales and revenues, costs of products sold increased by $375 million compared to the prior
year. The impact on costs of products sold from increased overall revenues included higher “traditional” unit
chargeouts, increased Engine segment shipments, the impact of consolidating our BDP and BDT operations, and the
prior year acquisition of Monaco. Partially offsetting these increases were manufacturing cost efficiencies in our Class
8 heavy truck and School bus product lines, lower net adjustments of accruals for pre-existing warranty, and improved
material costs. Excluding the reversal of the warranty costs of $75 million related to the Ford Settlement in 2009,
product warranty costs, including extended warranty program costs and net of vendor recoveries (“product warranty
costs”), decreased by $63 million due to higher pre-existing warranty adjustments and higher costs per-unit in 2009.
Emissions regulations in the U.S. and Canada have resulted in rapid product development cycles, driving significant
changes from previous engine models and requiring new emissions-compliant products that are more complex and
28
contain higher material costs. Consequently, repair costs in the prior year exceeded those that we had historically
experienced. Commodity costs, which include steel, precious metals, resins, and petroleum products, decreased
by $49 million in 2010 as compared to the prior year.
Restructuring charges
Restructuring charges of $59 million in 2009 related to restructuring actions at our Indianapolis Engine Plant
(“IEP”) and Indianapolis Casting Corporation (“ICC”) locations. Restructuring charges representing a benefit of
$15 million in 2010 include $16 million due to the favorable settlement of a portion of contractual obligations
related to the IEP and ICC restructuring and $10 million attributable to the reversal of our remaining
restructuring reserves for ICC as a result of our decision to continue operations at ICC. Also related to the
ratification of a new collective bargaining agreement at ICC, we incurred $6 million of charges in Costs of
products sold for supplemental unemployment and healthcare benefits. In addition, our Truck segment
recognized $9 million of restructuring charges for personnel costs for employee termination and related benefits
resulting from the UAW contract ratification and planned wind-down of UAW positions at our Fort Wayne
facility. We expect to incur additional restructuring charges in the future as plans are developed to relocate the
Company’s headquarters and other industrial facilities. For more information, see Note 2, Ford settlement and
related charges, and Note 3, Restructuring, to the accompanying consolidated financial statements.
Impairment of property and equipment
Impairment of property and equipment of $31 million in 2009 related to changes in our business and volumes at
the Chatham and Conway locations in our Truck segment. For additional information, see Note 9, Impairment of
property and equipment, to the accompanying consolidated financial statements.
Selling, general and administrative expenses
2010
2009
Change
%
Change
(in millions, except % change)
Selling, general and administrative expenses, excluding items
presented separately below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,016
$
858
$
158
18
Postretirement benefits expense allocated to selling, general and
administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dealcor expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incentive compensation and profit-sharing . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personnel costs for employee terminations . . . . . . . . . . . . . . . . . . . . . .
157
145
63
27
(2)
205
162
54
52
13
(23)
(48)
(10)
(17)
17
9
(25)
(48)
(15) N.M.
Total selling, general and administrative expenses . . . . . . . . . . . . . . . .
$
1,406
$
1,344
$
62
5
Selling, general and administrative expenses increased by $62 million compared to the prior year primarily due
to increased costs related to our South American engine operations, the consolidation of our BDP operations, and
increased incentive compensation and profit sharing. In 2010, our South American engine operations incurred
$46 million of increased expenses largely due to increased engine shipments during 2010. In conjunction with a
period of lower volumes in the prior year, our South American operations limited selling, general and
administrative expenses during 2009. The consolidation of our BDP operations resulted in additional selling,
general and administrative expenses of $24 million. Furthermore, the increase in our incentive compensation and
profit-sharing expenses reflects our improved 2010 performance and our actual 2009 performance compared to
our management incentive targets. These increases were partially offset by reductions in our postretirement
benefits expenses, lower Dealcor expenses due to the sale of certain company-owned dealerships and lower costs
at our remaining facilities, as well as continued focus on our cost reduction initiatives. Postretirement benefits
29
expenses decreased by $48 million largely due to lower interest expense from decreased discount rates and
changes made to our OPEB plans relating to Medicare Part D. For more information, see Note 13, Postretirement
benefits, to the accompanying consolidated financial statements.
Engineering and product development costs
Engineering and product development costs are incurred by our Truck and Engine segments for product
innovations, cost reductions, and to enhance product and fuel-usage efficiencies. Engineering and product
development costs are largely due to the development of our 2010 emissions-compliant products.
Engineering and product development costs increased by $31 million compared to the prior year primarily due to
increased Engine segment costs related to our launch of 2010 emissions-compliant engines, efforts to develop our
MaxxForce 15 engine, and improving our EGR and other technologies to meet ongoing emissions regulations.
Partially offsetting the increase were engineering costs incurred in the prior year within our Truck segment
related to military vehicles that were not repeated in 2010.
Interest expense
The following table presents the components of interest expense:
(in millions, except % change)
Manufacturing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Services operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
140
108
5
253
$
$
88
120
43
251
$
$
52
(12)
(38)
2
59
(10)
(88)
1
2010
2009
Change
%
Change
Interest expense was flat as compared to the prior year largely due to lower debt balances in our Financial
Services operations and lower derivative interest expense, offset by increased interest rates in our manufacturing
operations. In October 2009, we completed the sale of our Senior Notes and our Convertible Notes. As a result of
the new accounting guidance for convertible debt adopted November 1, 2009, we reclassified $114 million of the
original principal amount on the Convertible Notes to additional paid in capital, resulting in a discount that will
be amortized into interest expense. The offering discount and underwriter fees on the Senior Notes and
Convertible Notes are amortized to interest expense over their respective lives resulting in effective rates of
8.96% and 8.42%, respectively. For more information, see Note 12, Debt, and Note 16, Financial instruments
and commodity contracts, to the accompanying consolidated financial statements.
Other income, net
Other income, net was $44 million for 2010 and was primarily comprised of reductions to reserves in the second
quarter within our Truck and Engine segments for certain value added taxes in Brazil that were reassessed and
determined to be recoverable. For 2009, other income, net of $228 million largely related to the Ford Settlement
and related charges within our Engine segment.
Equity in (loss) income of non-consolidated affiliates
Equity in (loss) income of non-consolidated affiliates is derived from our ownership interest in partially-owned
affiliates, which are not consolidated. We reported a loss of $50 million in 2010, which is primarily reflective of
our continued investment and start-up losses associated with certain joint ventures, as compared to income of $46
million for 2009 that principally related to our equity in income from our BDP joint venture. As part of the Ford
Settlement, we increased our interests in the BDT and BDP joint ventures with Ford to 75% in the third quarter
30
of 2009. As a result, the BDT and BDP operations were consolidated beginning June 1, 2009 and accordingly are
not included in equity in (loss) income of non-consolidated affiliates prospectively. For more information, see
Note 2, Ford settlement and related charges, and Note 11, Investments in and advances to non-consolidated
affiliates, to the accompanying consolidated financial statements.
Income tax expense
Income tax expense was $23 million in 2010 as compared to $37 million in 2009. Our income tax expense on
U.S. and Canadian operations is limited to current state income taxes, alternative minimum tax net of refundable
credits, and other discrete items. In 2010, we recognized a U.S. alternative minimum tax benefit of $29 million as
a result of legislation that provides for the refund of alternative minimum taxes from the carryback of alternative
minimum taxable losses to prior years. We have $461 million of U.S. net operating losses as of October 31,
2010. We expect our cash payments of U.S. taxes will be minimal, for so long as we are able to offset our U.S.
taxable income by these U.S. net operating losses, however our foreign taxes will continue to grow as we
increase our global presence. If U.S. operations continue to improve, we believe it is reasonably possible within
the next twelve months that we may release all or a portion of our U.S. valuation allowance. For additional
information, see Note 14, Income taxes, to the accompanying consolidated financial statements.
Extraordinary gain, net of tax
In 2009, we completed the purchase of certain assets of the former RV manufacturing business of Monaco Coach
Corporation. Due to the fair market value of the acquired assets exceeding the purchase price, we recognized an
extraordinary gain of $23 million in 2009.
Net income attributable to non-controlling interests
Net income attributable to non-controlling interests is the result of our consolidation of subsidiaries in which we
do not own 100%. Substantially all of the $44 million and $25 million of net income attributable to
non-controlling interests for 2010 and 2009, respectively, relates to Ford’s non-controlling interest in BDP.
Out of period adjustments
Our reported net income for 2009 included immaterial out-of-period adjustments of $29 million. For more
information, see Note 1, Summary of significant accounting policies, to the accompanying consolidated financial
statements.
Segment Results of Operations for 2010 as Compared to 2009
We define segment profit (loss) as net income (loss) attributable to Navistar International Corporation excluding
income tax expense. For additional information about segment profit (loss), see Note 18, Segment reporting, to
the accompanying consolidated financial statements. The following sections analyze operating results as they
relate to our four segments and do not include intersegment eliminations:
Truck Segment
(in millions, except % change)
Truck segment sales – U.S. and Canada . . . . . . . . . . . . . . . . . . . . . . . .
Truck segment sales – ROW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Truck segment sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Truck segment profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
7,393
814
8,207
424
$
$
$
6,807
490
7,297
147
$
$
$
586
324
910
277
9
66
12
188
2010
2009
Change
%
Change
31
Segment sales
Truck segment sales increased by $910 million as compared to the prior year largely as a result of higher unit
volume in our commercial business partially offset by a decrease in defense sales. Our commercial business sales
increased primarily as a result of increases in our “traditional” business, and further benefited from an increase in
the average sales price across all of our “traditional” classes due to favorable pricing and a shift in product mix.
Our ROW sales improved largely due to the strengthening of the global economy, as well as the consolidation of
our BDT operations that increased sales by $115 million. Also contributing to the increase in sales was an
improvement in used truck sales driven by increased demand and increases in used equipment prices, and the
acquisition of Monaco that resulted in additional sales of $128 million for 2010.
Chargeouts of “traditional” units were 6,400 units higher in 2010 compared to the prior year, with a greater mix
of Class 8 heavy and Class 8 severe service trucks contributing to higher overall revenue. While chargeouts on
our “expansionary” business including military increased by 4,700 units in aggregate as compared to the prior
year, we were negatively impacted by the effects of product mix and lower sales of higher revenue per unit
military vehicles driven by the timing of prior year deliveries to the U.S. military.
Segment profit
Truck segment profit increased by $277 million as compared to the prior year, to $424 million for 2010. The
increase was primarily due to increased commercial chargeouts, as well as further material cost improvements
and manufacturing efficiencies that translated into improved margins on our vehicles. We further benefited from
the stabilization of the used truck market and improved demand for used equipment. In addition, engineering and
product development costs decreased by $20 million in 2010 primarily related to lower military vehicle
development costs and we recognized impairment charges of $31 million in 2009 related to changes in our
business and volumes at the Chatham and Conway locations, that were not repeated in 2010. Finally, we
recognized a benefit in 2010 from a $30 million reduction in reserves for certain value added taxes in Brazil that
were reassessed and determined to be recoverable. Partially offsetting the increase in segment profit were lower
defense chargeouts primarily due to fewer orders from the U.S military compared to the prior year, the
extraordinary gain of $23 million in 2009 related to our purchase of Monaco, and increased equity in loss of
non-consolidated affiliates of $51 million as we continue to incur start-up losses and make ongoing investments
in our joint ventures.
Engine Segment
2010
2009
Change
%
Change
(in millions, except % change)
Engine segment sales – U.S. and Canada . . . . . . . . . . . . . . . . . . . . . . .
Engine segment sales – ROW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Engine segment sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engine segment profit(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
1,611
1,375
2,986
51
$
$
$
1,836
854
2,690
253
$
$
$
(225)
521
296
(12)
61
11
(202)
(80)
(A) Included in Engine segment profit for 2009 was income of $160 million from the Ford Settlement, net of related charges.
Segment sales
The increase in Engine segment sales for 2010 compared to prior year was primarily due to increased engine
sales in South America, including favorable foreign exchange impacts of $134 million, the impact of
consolidating our BDP operations, and increased intercompany sales driven by higher unit volumes as well as a
shift in product mix to higher revenue units. These increases were partially offset by decreased volumes in North
America due to the loss of the Ford business. While sales of engines to Ford in the U.S. and Canada decreased by
32
76,600 units in 2010 as compared to the prior year, the Engine segment benefited from a ramp up in purchases by
Ford during the first quarter prior to the expiration of the supply contract. ROW sales increased in 2010 primarily
due to strong demand, the effects of favorable exchange rates, and increases in the price per engine in South
America. The impact of consolidating our BDP operations further increased Engine segment sales in the U.S. and
Canada by $378 million for 2010.
Segment profit
In 2010, the Engine segment recognized decreased segment profits of $69 million, excluding the effects of the
Ford Settlement, largely due to lower volumes in North America due to the loss of the Ford business, partially
offset by higher sales volumes and improved manufacturing performance in South America. Overall, Engine
segment profit decreased $202 million for 2010 compared to the prior year, which included a $160 million
benefit from the Ford Settlement net of restructuring and related charges. Further contributing to the decrease
were lower volumes in North America due to the loss of the Ford business, increased selling, general and
administrative expenses and engineering and product development costs, and a $14 million charge relating to the
settlement of various tax contingencies in Brazil in 2010. Increased selling, general and administrative expenses
were largely driven by higher sales and marketing expenses, including unfavorable foreign exchange, in South
America of $25 million as a result of our increased engine shipments in 2010. In conjunction with a period of
lower volumes in the prior year, our South American operations limited selling, general and administrative
expenses. Further driving increased selling, general and administrative expenses were field testing costs
associated with the launch of our 2010 emissions-compliant products. In addition, engineering and product
development costs increased by $49 million largely due to our 2010 emissions-compliant products as well as the
development of our MaxxForce 15 engine and other product programs. Partially offsetting the decreases in
segment profit were lower net adjustments of accruals for pre-existing warranties of $52 million, the positive
impact of the consolidation of BDP results of $25 million, and a benefit of $16 million due to the settlement of a
portion of our other contractual costs related to our 2009 restructuring charges at IEP and ICC.
Parts Segment
(in millions, except % change)
Parts segment sales – U.S. and Canada . . . . . . . . . . . . . . . . . . . . . . . .
Parts segment sales – ROW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Parts segment sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Parts segment profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
1,718
167
1,885
266
$
$
$
2,038
135
2,173
436
$
$
$
(320)
32
(288)
(170)
(16)
24
(13)
(39)
2010
2009
Change
%
Change
Segment sales
The decrease in Parts segment sales was largely due to declines in U.S. military sales of $489 million, which
were predominately driven by the fulfillment of higher military vehicle fielding orders in the prior year as
compared to 2010. The decreases were partially offset by improvements in our commercial markets in the U.S
and our global businesses, as well as the favorable impacts of foreign exchange on our Canadian operations of
$27 million.
Segment profit
The decrease in Parts segment profit of $170 million was primarily due to the decrease in military sales, partially
offset by improvements in commercial sales.
33
Financial Services Segment
(in millions, except % change)
Financial Services segment revenues – U.S. and Canada(A) . . . . . . . . . . . . .
Financial Services segment revenues – ROW . . . . . . . . . . . . . . . . . . . . . . .
Total Financial Services segment revenues, net . . . . . . . . . . . . . . . . . . . . . .
Financial Services segment profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(A) Our Financial Services segment does not have Canadian operations or revenues.
2010
2009
Change
%
Change
$
$
$
254
55
309
95
$
$
$
268 $
80
348
40
$
$
(14)
(25)
(39)
(5)
(31)
(11)
55
138
Segment revenues
Our Financial Services segment revenues declined as compared to the prior year primarily due to a decrease of
$362 million in the average finance receivable balance, to $2.9 billion as of October 31, 2010. The decline in the
average finance receivable balance was primarily due to customer payments and a reduction in financing
originations as a result of fewer vehicle and service parts sales, and reflects the overall declining trend of
financing originations whereby the retail portfolio has liquidated faster than new acquisitions have been financed.
Furthermore, loan originations under the GE Operating Agreement began in the third quarter of 2010, which will
continue to reduce NFC originations and portfolio balances in the future. Partially offsetting the decline in loan
originations was $524 million of wholesale notes, less fair value discounts, resulting from the consolidation of
the Master Trust as of July 31, 2010. Wholesale note balances related to the Master Trust, less fair value
discounts, were $700 million at October 31, 2010. Securitization income included in our Financial Services
segment revenues decreased to $35 million as of October 31, 2010 as a result of an adverse change in the fair
value of our retained interests in sold receivables, as well as the consolidation of the Master Trust due to Master
Trust income subsequent to July 31, 2010 being included in financing revenue rather than securitization income.
Aggregate interest revenue and fees, charged primarily to the Truck and Parts segments, were $90 million and
$79 million in 2010 and 2009, respectively.
The following table presents contractual maturities of finance receivables for our Financial Services segment,
which primarily drives Financial Services segment revenues. For more information, see Note 6, Finance
receivables, to the accompanying consolidated financial statements.
(in millions, except % change)
Due in one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in two years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in three years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,881
526
359
377
1,831
696
478
494
$
50
(170)
(119)
(117)
Gross finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,143
$
3,499
$
(356)
2010
2009
Change
%
Change
3
(24)
(25)
(24)
(10)
Segment profit
The increase in Financial Services segment profit was largely attributable to decreased interest expense and
lower provision for loan loss of $15 million as portfolio balances, charge-offs and specific reserves have
declined, partially offset by lower revenues. Derivative expense, included within interest expense, decreased by
$36 million in 2010 compared to the prior year due to a decrease in forward interest rate curves in the prior year
causing net fair values to decrease significantly. Additionally, the average notional amounts of amortizing
interest rate swap derivatives were lower, and all swaps were eventually eliminated during 2010 in conjunction
with the pay-off of variable-rate debt. Interest expense further decreased by $23 million compared to the prior
34
year primarily due to lower debt balances more than offsetting higher interest rates on existing debt during 2010.
Financial Services debt balances were $2.9 billion and $3.4 billion as of October 31, 2010 and 2009, respectively. The
lower borrowings were primarily due to lower average balances of our finance receivables.
2009
2008
Change
%
Change
$
11,569
$
14,724
$
(3,155)
(21)
Results of Operations for 2009 as Compared to 2008
(in millions, except per share data and % change)
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . .
Engineering and product development costs . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expenses, net
9,366
59
31
1,344
433
251
(228)
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in income of non-consolidated affiliates . . . . . . . . . . . . . . . . . . .
11,256
46
Income before income tax and extraordinary gain . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to non-controlling interests . . . . . . . . . . .
Net income attributable to Navistar International Corporation . . . . . . .
$
359
37
322
23
345
25
320
Diluted earnings per share:
Income attributable to Navistar International Corporation before
extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Navistar International Corporation . . .
$
$
4.14
0.32
4.46
$
$
$
11,942
—
358
1,437
384
469
14
14,604
71
191
57
134
—
134
—
134
(22)
(2,576)
N.M.
59
(91)
(327)
(6)
(93)
13
49
(218)
(46)
(242) N.M.
(3,348)
(25)
168
(20)
188
23
211
25
186
(23)
(35)
88
(35)
140
N.M.
157
N.M.
139
1.82
—
1.82
$
$
2.32
0.32
2.64
127
N.M.
145
Sales and revenues, net
Our sales and revenues, net by geographic region, are as follows:
Total
U.S. and Canada
ROW
2009
2008
Change
%
Change
2009
2008
Change
%
Change
2009
2008
Change
%
Change
7,297 $
2,690
2,173
10,317 $
3,257
1,824
(3,020)
(567)
349
(29)
(17)
19
$
6,807 $
1,836
2,038
8,933 $
1,949
1,648
(2,126)
(113)
390
(24)
(6)
24
$
490 $
854
135
1,384 $
1,308
176
(894)
(454)
(41)
(65)
(35)
(23)
(in millions,
except % change)
Truck . . . . . . . . . . . $
Engine . . . . . . . . . .
Parts . . . . . . . . . . . .
Financial
Services . . . . . . .
348
405
(57)
(14)
268
296
(28)
(9)
80
109
(29)
(27)
Corporate and
Eliminations . . . .
(939)
(1,079)
140
(13)
(939)
(1,079)
140
(13)
—
—
— —
Total . . . . . . . . . . . . $ 11,569 $
14,724 $
(3,155)
(21)
$
10,010 $
11,747 $
(1,737)
(15)
$
1,559 $
2,977 $
(1,418)
(48)
35
Truck segment sales decreased by 29% in 2009 as compared to the prior year. The primary drivers of the
decrease were lower U.S. military sales and a weak North American truck market. Decreased U.S. military sales
were driven by the deliveries of remaining MRAP orders in early 2009 and were partially offset by increased
sales of lower revenue per unit military vehicles to the U.S. military and NATO allies. We experienced lower
overall commercial chargeouts as a result of the weakness in the overall “traditional” industry, which more than
offset the higher chargeouts from our Class 8 heavy trucks as a result of the success of our ProStar trucks. Key
economic indicators affecting the truck industry such as gross domestic product, industrial production, and
freight tonnage hauled declined in 2009 as compared to the prior year, and we did not experience a substantial
pre-buy of pre-2010 emissions-compliant engines in 2009. Furthermore, our ROW sales were significantly
affected in 2009 as we faced the global recession.
Engine segment sales decreased by $567 million, and total units shipped were down by 76,200 units in 2009 as
compared to the prior year. Units shipped to Ford in North America decreased by 24,000 units compared to the
prior year as Ford reduced its purchasing requirements. Furthermore, our South American sales were down
36,000 units in 2009. The reduction in units shipped to Ford in North America was further exacerbated by the
worst “traditional” North American truck market since 1962 as a result of the worldwide recession.
Our Parts segment sales increase was driven by U.S. MRAP service parts and other military service parts orders,
which more than offset the adverse impacts of the economic recession on our commercial markets. We
experienced a sales decline within our commercial products, which is consistent with lower service repair
demand due to poor economic conditions. The lower tonnage hauled by freight carriers, coupled with eroding
profitability, reduced our customers’ need and ability to buy service parts.
Our Financial Services segment revenues decreased reflecting the decline in average finance receivables of $852
million in 2009 as compared to 2008, partially offset by an increase in securitization income driven by a decrease
in discount rates. The decline in average finance receivable balances reflected customer payments and a
reduction in new financing opportunities resulting from fewer sales of vehicles and components due to reduced
customer demand, which was driven by the difficult economic environment in the U.S. and Mexico markets.
Costs of products sold
Costs of products sold decreased in 2009 as compared to the prior year, as a result of lower chargeouts and
associated material purchases of commercial trucks and changes in mix of military products largely driven by a
shift from higher cost vehicles manufactured for the U.S. military to lower cost military trucks based on
commercial platforms. In addition, costs of products sold further decreased due to lower diesel engine and
service parts deliveries to the commercial market that were offset partially by $81 million of other Ford related
charges and higher direct material commodity costs. We were not able to fully capitalize on some of the
commodity cost savings experienced by the industry due to pre-existing contractual obligations. Overall, those
efforts delayed and reduced the higher expense that the industry had experienced in prior years. Costs related to
steel, precious metals, resins and petroleum products increased by $23 million in 2009 compared to an increase
of $97 million in 2008. Product warranty costs decreased by $27 million as compared to 2008 and were driven
primarily by a reversal of $75 million of product warranty costs related to the Ford Settlement. In addition, the
decrease in product warranty costs were the result of lower volumes and lower claims out of the contractual
obligation period offset partially by adjustments to warranty accruals for changes in our estimates of warranty
costs for products sold in prior years (“pre-existing warranty”) of $39 million and higher per unit costs.
Excluding the reversal of the warranty costs related to the Ford Settlement, the increase in product warranty costs
were due to higher pre-existing warranty adjustments and higher per unit costs, which were primarily driven by
2007 U.S. EPA regulations that drove rapid product development cycles and resulted in significant changes from
previous engine models. The 2007 U.S. EPA regulations required new emission compliant products which were
more complex and contain higher material costs. Consequently, repair costs have exceeded those that we had
historically experienced. In the past, our engines typically had a longer model lifecycle that afforded us the
opportunity to refine both the design and manufacturing of the product to reduce both the volume and the
severity of warranty claims.
36
Restructuring charges
Restructuring charges relate to activities at our IEP and ICC locations in 2009. Due to significant reductions from
Ford, we changed our business strategy regarding our manufacturing activities in our IEP and ICC locations
while maintaining certain quality control and manufacturing engineering services. We recognized $59 million of
restructuring charges for contractual obligations, personnel costs for employee termination and related benefits,
charges for postretirement contractual terminations benefits and a plan curtailment. For more information, see
Note 2, Ford settlement and related charges, to the accompanying consolidated financial statements.
Impairment of property and equipment
Impairment of property and equipment was $31 million in 2009 and related to changes in our business and
volumes at the Chatham and Conway locations within our Truck segment. In 2008, we incurred impairment
charges of $358 million as a result of permanently lower Ford volumes in our Engine segment. For additional
information about these items, see Note 9, Impairment of property and equipment, to the accompanying
consolidated financial statements.
Selling, general and administrative expenses
2009
2008
Change
%
Change
(in millions, except % change)
Selling, general and administrative expenses, excluding items
presented separately below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional consulting, legal, and auditing fees . . . . . . . . . . . . . . . . .
Postretirement benefits expense (income) allocated to selling, general
and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dealcor expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Incentive compensation and profit-sharing . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personnel costs for employee terminations . . . . . . . . . . . . . . . . . . . . .
$
$
818
40
205
162
54
52
13
976
165
(65)
218
78
65
—
$
(158)
(125)
(16)
(76)
270 N.M.
(26)
(56)
(31)
(24)
(13)
(20)
13 N.M.
Total selling, general and administrative expenses . . . . . . . . . . . . . . .
$
1,344
$
1,437
$
(93)
(6)
The decreases in selling, general and administrative expenses for 2009 as compared to the prior year were driven
by declines in our professional consulting and auditing fees related to SEC filings and from other cost reduction
measures actively pursued in 2009, which were offset partially by an increase in our postretirement benefits
expense. We had a significant reduction in professional expenses as we became a current SEC filer in 2009 and
made improvements in our accounting and control environment. Furthermore, Dealcor expenses declined in 2009
following the sale of certain company-owned dealerships and lower costs at our remaining locations. The
expense for incentive compensation and profit sharing reflected previously projected 2009 and actual 2008
performance compared to our management incentive targets at the respective year ends. The decline in the 2009
provision for doubtful accounts was a result of the lower average finance receivable balances partially offset by
an increase in our allowance ratio to outstanding finance receivables and loss reserves for specific customers as
compared to 2008. During 2009, repossessions and delinquencies began to decline due to the stabilization of the
truck industry and the general economy. These decreases were partially offset by increases in postretirement
benefits expenses charged to selling, general and administrative expenses of $270 million as compared to 2008.
These increases were largely driven by a lower asset base at the beginning of 2009 as compared to 2008, which is
used to determine the total expected return for the fiscal year (and is a component of net postretirement benefits
expense), and a decrease in the expected return on assets for defined benefit plans resulting from lower plan
assets. In the first quarter of 2009, we recognized $16 million of expense for a curtailment and contractual
termination benefits related to our Indianapolis location. During 2008, we recognized a $42 million gain related
37
to a net settlement and curtailment of one of the plans resulting from certain plan changes that arose from the
ratification of our UAW settlement. See Note 13, Postretirement benefits, to the accompanying consolidated
financial statements for further discussion.
Engineering and product development costs
Engineering and product development costs increased slightly in 2009 as compared to the prior year. Such costs
were incurred by our Truck and Engine segments for product innovation and manufacturing cost reductions, and
to provide our customers with product and fuel efficiencies. Engineering and product development costs incurred
at the Truck segment were $207 million in 2009, which compares to $181 million incurred in 2008, and related
primarily to the further development of various military truck applications and 2010 emissions-compliant
products. Engineering and product development costs incurred at our Engine segment were $228 million in 2009,
which compares to $201 million in 2008. This increase is a result of the efforts to develop our MaxxForce 15
engine and improving our EGR and other technology in meeting the 2010 U.S. EPA emissions regulations.
Interest expense
The following table presents the components of interest expense:
(in millions, except % change)
Manufacturing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Services operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
88
120
43
251
$
$
154
258
57
469
$
(66)
(138)
(14)
$
(218)
(43)
(53)
(25)
(46)
2009
2008
Change
%
Change
The decrease in interest expense of $218 million in 2009 as compared to the prior year primarily reflects lower
debt balances and lower interest rates at our Financial Services segment, decreases in our variable interest rates
on our manufacturing operations debt, and a reduction in derivative expense in 2009. Debt balances at our
Financial Services segment decreased as a result of lower average balances of our finance receivables. For more
information, see Note 12, Debt, and Note 16, Financial instruments and commodity contracts, to the
accompanying consolidated financial statements.
Other (income) expenses, net
Other (income) expenses, net amounted to income of $228 million in 2009 and expense of $14 million in 2008.
The increase in 2009 is primarily due to the $225 million benefit related to the Ford Settlement and other related
charges. In 2009 and 2008, we recorded interest income of $21 million and $42 million, respectively, primarily
offset by various other miscellaneous expenses. In 2009, there was a foreign exchange gain of $36 million
primarily due to favorable currency fluctuations primarily in our operations in Canada, as compared to foreign
exchange losses of $19 million in 2008. Additionally, other (income) expenses, net for 2009 included $16 million
of income representing a reduction to reserves for recovery of certain value added taxes in Brazil that were
reassessed and determined to be recoverable within our Engine segment.
Equity in income of non-consolidated affiliates
We reported $46 million and $71 million of equity in income of non-consolidated affiliates for 2009 and 2008,
respectively. As part of the Ford Settlement, we increased our equity interest in the BDT and BDP joint ventures
with Ford to 75% and, effective June 1, 2009, the results of BDT and BDP operations were consolidated.
Accordingly, our share of the results of these entities was no longer included within equity in income of
38
non-consolidated affiliates. For more information, see Note 2, Ford settlement and related charges, and Note 11,
Investments in and advances to non-consolidated affiliates, to the accompanying consolidated financial
statements.
Income tax expense
Income tax expense was $37 million in 2009 as compared to $57 million in 2008. Our income tax expense on
domestic and Canadian operations was limited to current state income taxes, alternative minimum tax net of
refundable credits and other discrete items. The majority of our income taxes in 2009 were from foreign
operations, principally Brazil and Mexico. Our income tax expense was affected by various items, including
deferred tax asset valuation allowances (principally domestic and Canadian), research and development credits,
Medicare reimbursements, and other items. A full deferred tax asset valuation allowance was adopted for the
Canadian operations as of October 31, 2008. Accordingly, the operating loss in Canada did not generate a
deferred tax benefit in 2009. For additional information, see Note 14, Income taxes, to the accompanying
consolidated financial statements.
Extraordinary gain, net of tax
In 2009, we completed the purchase of certain assets of the former RV manufacturing business of Monaco Coach
Corporation and created a new wholly-owned affiliate company operating under the name of Monaco RV, LLC.
We accounted for the acquisition as a business combination. The fair value of the assets acquired from Monaco
Coach Corporation exceeded the purchase price resulting in an extraordinary gain of $23 million in 2009.
Net income attributable to non-controlling interests
As part of the Ford settlement in 2009, we increased our equity interest in our BDT and BDP joint ventures with
Ford to 75% and, effective June 1, 2009, the results of BDT and BDP operations were consolidated. Ford’s 25%
minority interests in BDT and BDP results were $25 million.
Out of period adjustments
Our reported net income for 2009 included immaterial out-of-period adjustments of $29 million. For more
information, see Note 1, Summary of significant accounting policies, to the accompanying consolidated financial
statements.
Segment Results of Operations for 2009 as Compared to 2008
We define segment profit (loss) as net income (loss) attributable to Navistar International Corporation excluding
income tax expense. For additional information about segment profit (loss), see Note 18, Segment reporting, to
the accompanying consolidated financial statements. The following sections analyze operating results as they
relate to our four segments and do not include intersegment eliminations:
Truck Segment
(in millions, except % change)
Truck segment sales – U.S. and Canada . . . . . . . . . . . . . . . . . . . . .
Truck segment sales – ROW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Truck segment sales, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Truck segment profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
6,807
490
7,297
147
$
$
$
8,933
1,384
10,317
805
$
$
$
(2,126)
(894)
(3,020)
(658)
(24)
(65)
(29)
(82)
2009
2008
Change
%
Change
39
Segment sales
Truck segment sales decreased by $3.0 billion from the prior year largely as a result of lower sales to the U.S.
military and lower sales of our commercial products. Sales to the U.S. military decreased 44% primarily due to
the fulfillment our remaining MRAP unit orders in early 2009 and were partially offset by increased sales of
lower revenue per unit military vehicles to the U.S. military and NATO allies. We also experienced lower
commercial chargeouts as a result of weakness in the overall “traditional” industry. However, we were able to
mitigate some of the effects of the Class 8 heavy truck market decline as market acceptance led to higher
chargeouts of our ProStar products. In addition, our school bus chargeouts increased as a result of major
customers re-timing their purchases from 2008 to 2009. Chargeouts in our Class 6 and 7 medium trucks were
negatively impacted primarily by the declining economic conditions that dampened demand, as well as an influx
of competitors with aggressive pricing strategies. During 2009, our School bus, Class 6 and 7 medium truck, and
combined Class 8 truck classes all led their markets with the greatest retail market share in each of their classes
by brand. Our ROW sales declined by 65% as compared to the prior year due to the downturn in demand in the
global markets as we faced the global recession.
Segment profit
Truck segment profit decreased by $658 million as compared to the prior year primarily caused by decreased
sales to the U.S. military, lower “traditional” sales, and higher material costs as we continued to experience
higher direct material commodity costs due to existing contractual obligations. Further contributing to the
decrease was a $29 million low volume penalty related to our BDT affiliate prior to its consolidation, impairment
charges of $31 million related to changes in our Truck segment production facilities at our Chatham and Conway
locations, and increased engineering and product development costs of $26 million primarily related to increased
military vehicle development costs. Partially offsetting the decrease in segment profit were decreased selling,
general and administrative expenses of $148 million and an extraordinary gain of $23 million related to the
acquisition of certain assets from Monaco Coach Corporation in 2009. Selling, general and administrative
expenses declined due primarily to reductions in personnel to align with current market conditions and overhead
and infrastructure in support of sales activities. In addition, Dealcor expenses declined by $56 million following
the sale of certain company-owned dealerships and lower costs at our remaining locations.
Engine Segment
2009
2008
Change
%
Change
(in millions, except % change)
Engine segment sales – U.S. and Canada . . . . . . . . . . . . . . . . . . . . . . .
Engine segment sales – ROW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Engine segment sales, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engine segment profit (loss)(A)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
1,836
854
2,690
253
$
$
$
1,949
1,308
3,257
$
$
(113)
(454)
(567)
(6)
(35)
(17)
(366) $
619 N.M.
(A) Included in Engine segment profit for 2009 was income of $160 million from the Ford Settlement, net of related charges. Included in
Engine segment loss for 2008 was a charge of $358 million for impairment of property and equipment, as well as other costs of $37
million, related to the loss of Ford volumes in North America.
Segment sales
Engine segment sales decreased compared to the prior year primarily due to the economic downturn and
industry-wide reductions in demand, including intercompany, ROW, and engines shipped to Ford, as well as the
impact of unfavorable exchange rates in South America. Partially offsetting these decreases was the impact of
consolidating our BDP operations, which increased sales by $85 million. Sales to non-Ford customers, including
intercompany sales, decreased by 38,800 units during 2009 as compared to the prior year. Intercompany units
sold to our Truck and Parts segment during 2009 decreased primarily due to lower mid-range engine sales
40
partially offset by an increase in our MaxxForce 11 and 13 engine sales. Our intercompany shipments to our
Truck segment are dependent on the North American markets for School buses, Class 6 and 7 medium trucks
and, to a lesser extent, Class 8 severe service trucks. In 2009, engines shipped to Ford represented 42% of our
unit volume as compared to 44% in 2008. In accordance with the Ford Settlement, we continued to provide diesel
engines to Ford in North America through December 31, 2009.
Segment profit
Overall, Engine segment profit increased $619 million in 2009 as compared to the prior year. Included within
Engine segment profit was a $160 million benefit from the Ford Settlement, net of restructuring and related
charges, for 2009 and $395 million of charges for impairments of property and equipment and other charges
related to the significant reduction in demand from Ford in 2008. For more information, see Note 2, Ford
settlement and related charges, and Note 9, Impairment of property and equipment, to the accompanying
consolidated financial statements.
Exclusive of the Ford Settlement and related charges, Engine segment profit increased $64 million in 2009 as
compared to the prior year. The increase in segment profit was largely attributable to decreased selling, general
and administrative costs of $37 million, the impact of the consolidation of BDP results, and a benefit related to a
reduction to reserves for recovery of certain value added taxes in Brazil of $16 million. Selling, general and
administrative costs declined in 2009 as compared to the prior year primarily due to increased legal expenses
related to the Ford litigation in the prior year and overall cost reduction measures actively pursued during 2009.
Partially offsetting these decreases were increased product warranty costs and increased engineering and product
development costs. Excluding the reversal of $75 million in warranty expense from the Ford Settlement,
warranty costs increased by $32 million in 2009 and were driven by higher costs per-unit and an increase in our
pre-existing warranty reserves for products sold in prior periods. The 2007 U.S. EPA regulations resulted in rapid
product development cycles and included significant changes from previous engine models. The new emissions-
compliant products are more complex, contain higher material costs and, consequently, repair costs have
exceeded those we have historically experienced. In the past, our engines typically had a longer model lifecycle
that afforded us the opportunity to refine both the design and manufacturing process to reduce both the volume
and the severity of warranty claims. Engineering and product development costs increased by $27 million in
2009 as compared to the prior year largely due to the development of our MaxxForce 15 engine, as well as new
products and the integration of other technologies to meet the requirements of the 2010 emissions regulations.
Parts Segment
(in millions, except % change)
Parts segment sales – U.S. and Canada . . . . . . . . . . . . . . . . . . . . . . . . .
Parts segment sales – ROW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Parts segment sales, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Parts segment profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
2,038
135
2,173
436
$
$
$
1,648
176
1,824
254
$
$
$
390
(41)
349
182
24
(23)
19
72
2009
2008
Change
%
Change
Segment sales
The increase in Parts segment sales in 2009 as compared to the prior year was primarily due to increased sales of
$519 million to the U.S. military for military vehicle fielding orders. Partially offsetting the increase were
decreases in our U.S. and Canada commercial and our global businesses caused by economic conditions and
weakened demand.
41
Segment profit
Parts segment profit increased by $182 million in 2009 as compared to the prior year. The improvement was
largely the result of our ability to expand into adjacent markets, primarily the military sector, without significant
additional investments in product development or distribution infrastructure.
Financial Services Segment
(in millions, except % change)
Financial Services segment revenues – U.S. and Canada(A) . . . . . . . . . . . . .
Financial Services segment revenues – ROW . . . . . . . . . . . . . . . . . . . . . . .
Total Financial Services segment revenues, net . . . . . . . . . . . . . . . . . . . . . .
Financial Services segment profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(A) Our Financial Services segment does not have Canadian operations or revenues.
2009
2008
Change
%
Change
$
$
$
268
80
348
40
$
$
$
296
109
405
$
$
(28)
(29)
(57)
(9)
(27)
(14)
(24) $
64 N.M.
Segment revenues
Our Financial Services segment revenues declined in 2009 compared to the prior year primarily as a result of a
decrease in the average finance receivable balance of $852 million. Average finance receivable balances were
$3.2 billion and $4.1 billion in 2009 and 2008, respectively. The decline in average finance receivable balances
was primarily due to customer payments and a reduction in financing originations as a result of fewer vehicle and
service parts sales, and reflects the overall declining trend of financing originations whereby the retail portfolio
has liquidated faster than new acquisitions have been financed. Declines in 2009 were further driven by lower
interest rates on receivables. Securitization income included in our Financial Services segment revenues was $41
million and $12 million for 2009 and 2008, respectively. Securitization income increased in 2009 versus the prior
year as a result of an increase in the fair value of our retained interests in sold receivables driven by the lower
discount rate. Aggregate interest revenue and fees, charged primarily to the Truck and Parts segments, were $79
million and $80 million in 2009 and 2008, respectively.
The following table presents contractual maturities of finance receivables for our Financial Services segment,
which primarily drives Financial Services segment revenues. For more information, see Note 6, Finance
receivables, to the accompanying consolidated financial statements.
(in millions, except % change)
Due in one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in two years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in three years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,831
696
478
494
$
1,941
891
622
649
$
(110)
(195)
(144)
(155)
Gross finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,499
$
4,103
$
(604)
2009
2008
Change
%
Change
(6)
(22)
(23)
(24)
(15)
Segment profit
Financial Services segment profit increased in 2009 from a loss in the prior year largely due to decreased interest
expense, partially offset by lower revenues. Derivative expense decreased by $14 million in 2009 as a result of
fluctuations in forward interest rate curves and the regular amortization of notional amounts, and interest expense
further decreased by $138 million primarily due to lower base interest rates and lower debt balances. Financial
Services debt balances were $3.4 billion and $4.2 billion as of October 31, 2009 and 2008, respectively, and
42
decreased primarily due to lower average balances of our finance receivables. The increase in Financial Services
segment profit was further driven by higher interest rates and fees charged to customers and manufacturing
operations.
Supplemental Information
The following tables provide additional information on Truck segment industry retail units, market share data,
order units, backlog units, chargeout units, and Engine segment shipments. These tables present key metrics and
trends that provide quantitative measures on the performance of our Truck and Engine segments.
Industry Retail Deliveries
The following table summarizes industry retail deliveries, for our “traditional” truck market, categorized by
relevant class, according to Wards Communications and R.L. Polk & Co.:
2010
2009
2008
Change
%
Change
Change
%
Change
2010 vs. 2009
2009 vs. 2008
(in units)
“Traditional” Markets (U.S. and
Canada)
School buses . . . . . . . . . . . . . . . . . . . .
Class 6 and 7 medium trucks . . . . . . .
Class 8 heavy trucks . . . . . . . . . . . . . .
Class 8 severe service trucks . . . . . . .
20,900
46,400
92,600
31,400
22,600
39,800
77,700
34,300
24,400
59,600
102,500
50,100
(1,700)
6,600
14,900
(2,900)
Total “traditional” Markets(A) . . . . . . . . . 191,300
174,400
236,600
16,900
Combined class 8 trucks . . . . . . . . . . . 124,000
Navistar “traditional” retail
112,000
152,600
12,000
(8)
17
19
(8)
10
11
(1,800)
(19,800)
(24,800)
(15,800)
(62,200)
(40,600)
(7)
(33)
(24)
(32)
(26)
(27)
deliveries . . . . . . . . . . . . . . . . . . . .
62,200
58,900
67,800
3,300
6
(8,900)
(13)
(A) Retail deliveries for 2009 and 2008 have been recast to exclude 7,400 units and 7,500 units, respectively, related to U.S. military
contracts to reflect our new methodology for categorization of “traditional” units.
Retail Delivery Market Share
The following table summarizes our retail delivery market share percentages, for our “traditional” truck market,
based on market-wide information from Wards Communications and R.L. Polk & Co.:
2010
2009
2008
“Traditional” Markets (U.S. and Canada)
School buses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class 6 and 7 medium trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class 8 heavy trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class 8 severe service trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined class 8 trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total “traditional” Markets(A)
59% 61% 55%
38
35
24
25
33
34
33
34
26
28
36
19
27
29
22
(A) Market share data for 2009 and 2008 has been recast to exclude units related to U.S. military contracts to reflect our new methodology
for categorization of “traditional” units.
43
Truck segment net orders
We define net orders (“orders”) as written commitments received from customers and dealers during the year to
purchase trucks. 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., Mexico, and Canada for destinations anywhere in the world and include trucks,
buses, and military tactical vehicles. 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 or incentives to the dealers. Increases in stock
orders typically translate to higher chargeouts for our Truck segment and increased dealer inventory. The
following table summarizes our net orders for “traditional” units:
2010
2009
2008
Change
Change Change
%
%
Change
2010 vs. 2009
2009 vs. 2008
(in units)
“Traditional” Markets (U.S. and Canada)
School buses . . . . . . . . . . . . . . . . . . . . . . .
Class 6 and 7 medium trucks . . . . . . . . . .
Class 8 heavy trucks . . . . . . . . . . . . . . . . .
Class 8 severe service trucks . . . . . . . . . .
7,800
17,700
20,200
10,000
18,300
15,100
19,900
11,100
11,900
19,400
22,600
13,500
(10,500)
2,600
300
(1,100)
Total “traditional” Markets(A) . . . . . . . . . . . .
55,700
64,400
67,400
(8,700)
(57)
17
2
(10)
(14)
6,400
(4,300)
(2,700)
(2,400)
(3,000)
54
(22)
(12)
(18)
(4)
Combined class 8 trucks . . . . . . . . . . . . . .
30,200
31,000
36,100
(800)
(3)
(5,100)
(14)
(A) Net orders for 2009 and 2008 have been recast to exclude 3,000 units and 9,600 units, respectively, related to U.S. military contracts to
reflect our new methodology for categorization of “traditional” units.
Truck segment 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 the backlog
of unfilled orders is 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. Order backlogs exclude units in inventory awaiting additional modifications or
delivery to the end customer. The following table summarizes our backlog for “traditional” units:
2010
2009
2008
Change
Change Change
%
%
Change
2010 vs. 2009
2009 vs. 2008
(in units)
“Traditional” Markets (U.S. and Canada)
School buses . . . . . . . . . . . . . . . . . . . . . . . .
Class 6 and 7 medium trucks . . . . . . . . . . .
Class 8 heavy trucks . . . . . . . . . . . . . . . . . .
Class 8 severe service trucks . . . . . . . . . . .
1,700
3,800
6,600
2,300
6,300
5,300
8,900
2,100
1,400
2,400
6,700
2,500
(4,600)
(1,500)
(2,300)
200
Total “traditional” Markets(A) . . . . . . . . . . . . .
14,400
22,600
13,000
(8,200)
Combined class 8 trucks . . . . . . . . . . .
8,900
11,000
9,200
(2,100)
(73)
(28)
(26)
10
(36)
(19)
4,900
2,900
2,200
(400)
9,600
1,800
350
121
33
(16)
74
20
(A) Backlog for 2009 and 2008 has been recast to exclude 1,200 units and 4,200 units, respectively, related to U.S. military contracts to
reflect our new methodology for categorization of “traditional” units.
44
Truck segment chargeouts
Chargeouts are defined by management as trucks that have been invoiced to customers, with units held in dealer
inventory primarily representing the principal difference between retail deliveries and chargeouts. The following
tables summarize our “traditional” chargeouts:
2010
2009
2008
Change
%
Change
Change
%
Change
2010 vs. 2009
2009 vs. 2008
(in units)
“Traditional” Markets (U.S. and Canada)
12,400
School buses . . . . . . . . . . . . . . . . . . . . . . . . . .
Class 6 and 7 medium trucks . . . . . . . . . . . . . 18,500
Class 8 heavy trucks . . . . . . . . . . . . . . . . . . . . 21,600
Class 8 severe service trucks . . . . . . . . . . . . . 10,700
Total “traditional” Markets(A) . . . . . . . . . . . 63,200
4,600
Military . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 19,100
“Expansion” Markets(B)
13,800
13,000
19,100
10,900
56,800
7,800
11,200
13,500
20,300
18,800
12,800
65,400
8,700
28,100
(1,400)
5,500
2,500
(200)
6,400
(3,200)
7,900
Total Worldwide Units(C) . . . . . . . . . . . . . . . 86,900
75,800
102,200
11,100
(10)
42
13
(2)
11
(41)
71
15
300
(7,300)
300
(1,900)
(8,600)
(900)
(16,900)
(26,400)
2
(36)
2
(15)
(13)
(10)
(60)
(26)
(A) Chargeouts for 2009 and 2008 each have been recast to exclude 7,500 units related to U.S. military contracts to reflect our new
methodology for categorization of U.S. military contracts, which were previously categorized within the “traditional” markets.
(B) Chargeouts for 2010 and 2009 include 3,800 units and 1,100 units, respectively, related to BDT sales to Ford.
(C) Chargeouts for 2010 and 2009 exclude 4,000 units and 1,000 units, respectively, related to RV towables.
Engine segment shipments
2010
2009
2008
Change
%
Change
Change
%
Change
2010 vs. 2009
2009 vs. 2008
(in units)
OEM sales—South America(A) . . . . . . . . .
Ford sales—U.S. and Canada . . . . . . . . . .
Intercompany sales . . . . . . . . . . . . . . . . . .
Other OEM sales . . . . . . . . . . . . . . . . . . . .
132,800
24,900
68,500
14,200
99,200
101,500
57,300
11,300
132,600
124,500
69,600
18,800
33,600
(76,600)
11,200
2,900
Total sales . . . . . . . . . . . . . . . . . . . . . . . . .
240,400
269,300
345,500
(28,900)
34
(75)
20
26
(11)
(33,400)
(23,000)
(12,300)
(7,500)
(76,200)
(25)
(18)
(18)
(40)
(22)
(A) Includes 22,300 units, 11,700 units, and 26,200 units in 2010, 2009, and 2008, respectively, related to Ford.
Liquidity and Capital Resources
(in millions)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 585
586
$1,212
—
$861
2
Cash, cash equivalents and marketable securities at end of the period . . . . . . . . . . . . . . .
$1,171
$1,212
$863
2010
2009
2008
Cash Requirements
We generate cash flow from the sale of trucks, diesel engines, and parts and from product financing provided to
our dealers and retail customers by the financial services operations. It is our opinion that, in the absence of
significant unanticipated cash demands, current and forecasted cash flow from our manufacturing operations,
financial services operations, and financing capacity will provide sufficient funds to meet anticipated operating
45
requirements, capital expenditures, equity investments, and strategic acquisitions. We also believe 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 our dealers. In July 2010, NFC
filed a Form 15 with the SEC and ceased filing reports under the Exchange Act. We do not expect this to have an
impact on our ability to access sufficient sources of financing. Our manufacturing operations are generally able
to access sufficient sources of financing to support our business plan. At October 31, 2010, our manufacturing
operations had $180 million available under an asset backed loan (“ABL”) credit facility which matures in 2012.
Consolidated cash, cash equivalents and marketable securities of $1.2 billion at October 31, 2010 includes $16
million of cash and cash equivalents attributable to BDT and BDP, as well as an immaterial amount of cash and
cash equivalents of certain VIEs that is generally not available to satisfy our obligations. For additional
information on the consolidation of BDT and BDP, see Note 1, Summary of significant accounting policies, to
the accompanying consolidated financial statements.
Cash Flow Overview
Financial
Services
Operations
and
Adjustments
Condensed
Consolidated
Statement of
Cash Flows
Manufacturing
Operations
(in millions)
For the Year Ended October 31, 2010
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . .
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the period . . . . . . . . . . . . . .
$ 409
(916)
(110)
(1)
(618)
1,152
Cash and cash equivalents at end of the period . . . . . . . . . . . . . . . . . . .
$ 534
$
$
698
482
(1,190)
1
(9)
60
51
$ 1,107
(434)
(1,300)
—
(627)
1,212
$
585
Financial
Services
Operations
and
Adjustments
Condensed
Consolidated
Statement of
Cash Flows
Manufacturing
Operations
(in millions)
For the Year Ended October 31, 2009
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . .
Increase in cash and cash equivalents upon consolidation of BDP and
BDT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the period . . . . . . . . . . . . . .
$ 534
(282)
36
9
297
80
775
$ 704
70
(800)
—
(26)
—
86
$1,238
(212)
(764)
9
271
80
861
Cash and cash equivalents at end of the period . . . . . . . . . . . . . . . . . . .
$1,152
$ 60
$1,212
46
Financial
Services
Operations
and
Adjustments
Condensed
Consolidated
Statement of
Cash Flows
Manufacturing
Operations
(in millions)
For the Year Ended October 31, 2008
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . .
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the period . . . . . . . . . . . . . .
$ 429
(216)
(133)
(21)
59
716
$ 691
(117)
(543)
(6)
25
61
$1,120
(333)
(676)
(27)
84
777
Cash and cash equivalents at end of the period . . . . . . . . . . . . . . . . . . .
$ 775
$ 86
$ 861
Manufacturing Operations cash flows and Financial Services Operations cash flows (collectively “non-GAAP financial information”) are not
in accordance with, or an alternative for, GAAP. The 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, giving
effect to the adjustments shown in the reconciliation above, 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, Engine segment, Parts segment, and Corporate items which includes certain eliminations. The reconciling differences between these
non-GAAP financial measures and our GAAP consolidated financial statements in Item 8, Financial Statements and Supplementary Data, are
our Financial Services Operations and adjustments required to eliminate certain intercompany transactions between Manufacturing Operations
and Financial Services Operations. Our Financial Services Operations cash flows are presented consistent with their treatment in our
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 analyses of operating results, to illustrate the respective cash flows giving effect to
the non-GAAP adjustments shown in the above reconciliation and to provide an additional measure of performance and liquidity.
Manufacturing Operations
Manufacturing Cash Flow from Operating Activities
Net cash provided by operating activities was $409 million for 2010 compared with net cash provided by
operating activities of $534 million for 2009 and cash provided by operating activities of $429 million for 2008.
The decrease in cash provided by operating activities in 2010 compared with 2009 was due to the cash received
as part of the Ford settlement in 2009 as well as increased receivables partially offset by an increase in accounts
payable. The increase in receivables in 2010 compared to 2009 was due primarily to an increase in sales at the
end of the year by our Truck and Engine segments. The increase in payables in 2010 compared to 2009 was
primarily attributable to a small increase in payables in 2010 compared to a large decrease in 2009 when volumes
declined significantly from the prior year.
The increase in cash provided by operating activities for 2009 compared with 2008 was due primarily to positive
impacts resulting from the Ford Settlement and improvements in working capital year over year. The change in
net working capital was primarily attributable to decreased receivables and inventories, net of the effects of
businesses acquired, partially offset by a reduction in payables. The decrease in receivables and inventories in
2009 compared with 2008 was primarily attributable to lower sales of MRAP units to the U.S. government.
Cash paid during the year for interest, net of amounts capitalized, was $75 million, $95 million, and $150 million
in 2010, 2009, and 2008, respectively. The decrease of $20 million from 2010 compared with 2009 resulted
primarily from the timing of interest payments on our Senior Notes. The decrease for 2009 compared to 2008
was due primarily to lower average interest rates and lower average debt balances in 2009.
The Company paid $27 million of income taxes in 2010, received net refunds of income taxes of $5 million in
2009 and paid $73 million of income taxes in 2008. The cash paid during 2010 was due primarily to higher levels
of taxable income of our foreign subsidiaries. The net cash refund received during fiscal year 2009 was due
primarily to refunds received from the carry back of foreign net operating losses.
47
Cash paid for costs associated with postretirement benefits including pension and postretirement health care
expenses for employees and surviving spouses and dependents was $219 million, $140 million, and $216 million
for 2010, 2009, and 2008, respectively. The increase in cash paid for 2010 compared to 2009 was due primarily
to higher minimum required pension funding for U.S. plans.
Manufacturing Cash Flow from Investing Activities
Cash used in investing activities was $916 million for 2010 compared with cash used in investing activities of
$282 million in 2009 and cash used by investing activities of $216 million in 2008. The use of cash in 2010 was
primarily related to investments in highly liquid marketable securities of $566 million, capital expenditures of
$232 million, and $97 million of investments in and advances to non-consolidated affiliates.
The increase in cash used in investing activities for 2010 compared to 2009 and 2008 is primarily due to the
increased investment in highly liquid marketable securities, increased capital expenditures and additional
investments in non-consolidated affiliates, partially offset by a decrease in cash paid for acquisitions. In 2010, we
invested $566 million in highly liquid marketable securities compared with net liquidations of $2 million and $4
million in highly liquid marketable securities in 2009 and 2008, respectively. In 2010, we had capital
expenditures of $232 million compared to $148 million and $168 million of capital expenditure in 2009 and
2008, respectively. During 2010, the Company invested $97 million into equity investments and joint ventures
compared to $44 million and $17 million in 2009 and 2008, respectively. Investments made in 2010 were
primarily related to NC2. In both 2009 and 2008, investments were made primarily to Mahindra Navistar
Automotives Ltd. and Mahindra Navistar Engines Private Ltd., both joint ventures with Mahindra & Mahindra
Ltd. There were no significant business acquisitions during 2010 compared to 2009 when the Company paid
approximately $50 million to acquire certain assets of Monaco Coach Corporation and approximately $18
million to acquire CDS. These acquisitions in 2009 also caused the increase in cash used in investing activities as
compared to 2008 since there were no significant business acquisitions in 2008.
Manufacturing Cash Flow from Financing Activities
Cash used in financing activities was $110 million in 2010 compared to cash provided by financing activities of
$36 million in 2009 and cash used by financing activities of $133 million in 2008. The net use of cash in 2010
was primarily related to principal payments under capital leases of $62 million, dividend payments from BDP to
Ford in the amount of $57 million, net payments for debt outstanding of $42 million, and the repayment of long
term debt of $24 million. Offsetting these uses of cash were proceeds of $35 million from the exercise of stock
options and $39 million from the proceeds of the issuance of long-term debt.
The increase in cash used in financing activities for 2010 compared with 2009 was primarily the result of a $164
million decrease in net borrowings and dividends payment from BDP to Ford. Prior to our increased interest in
BDP on June 1, 2009, we did not consolidate BDP and accordingly dividend payments from BDP to Ford were
not reflected in our Consolidated Statement of Cash Flows. Lower borrowing in 2010 was due to the 2009
refinancing which resulted in the issuance of our Senior Notes and Convertible notes. Also contributing to the
year over year difference is the fact that in 2010 we received $35 million of cash due to the exercise of stock
options whereas in 2009 we used $29 million for the repurchase of stock.
The increase in cash provided by financing activities for 2009 compared with a decrease in cash for 2008 was
primarily due to a $199 million increase in borrowings, net of repayments. The higher borrowings in 2009 were
partially offset by a use of proceeds of $36 million for debt issuance costs related to the higher borrowings and
$29 million in cash paid for a share repurchase program which expired in July 2009.
48
Financial Services Operations
Financial Services and Adjustments Cash Flow from Operating Activities
Cash from operating activities for the years ended October 31, 2010 and 2009 was $698 million and $704
million, respectively. The decrease in cash provided by operating activities in 2010 compared with 2009 was due
primarily to an increase in cash used to support net working capital partially offset by an increase in net income.
The increase in cash used to support net working capital in 2010 was primarily attributable to the close out of
interest rate swap derivatives in conjunction with the refinancing of variable-rate debt, and payments on
intercompany payables to our manufacturing operations, partially offset by a higher liquidation rate of our
finance receivables portfolio and a reduction in inventories. The decline in the finance receivables portfolio in
2010 resulted from fewer loan originations due to declining industry demand and the impact of the GE Operating
Agreement, combined with customer payments on existing balances. The decrease in inventory was attributable
to vehicle sales exceeding lease terminations and decreased repossessions as portfolio performance continues to
stabilize. The increase in net income was attributable to a decrease in interest expense resulting from lower debt
balances partially offset by lower revenues.
Cash from operating activities for the years ended October 31, 2009 and 2008 was $704 million and $691
million, respectively. The increase in cash provided by operating activities in 2009 compared with 2008 was due
primarily to an increase in net income and an increase in intercompany liabilities incurred with our
manufacturing operations, partially offset by the lower liquidation rate of our finance receivables portfolio.
Cash paid for interest, net of amounts capitalized, was $95 million and $116 million for 2010 and 2009,
respectively. The decrease of $21 million was due primarily to lower average debt balances for the year ended
October 31, 2010 compared with the year ended October 31, 2009.
Financial Services and Adjustments Cash Flow from Investing Activities
Cash from investing activities for the years ended October 31, 2010 and 2009 was $482 million and $70 million
respectively. The increase in cash provided by investing activities was due primarily to the elimination of the
cash collateral of TRIP, a special purpose, wholly-owned subsidiary of NFC. The TRIP credit facility, which
matured and was repaid in June 2010, was required to maintain a combined balance of $500 million of
receivables or cash collateral at all times. This cash collateral was classified as restricted cash and cash
equivalents. The change from a cash used position to a cash provided position for the year ended October 31,
2009 compared to 2008 was due primarily to a reduction in the cash collateral of TRIP as receivables collateral
increased.
Financial Services and Adjustments Cash Flow from Financing Activities
Cash used in financing activities for the years ended October 31, 2010 and 2009 was $1.2 billion and $800
million, respectively. The increase in cash used in financing activities was due primarily to a net payment of
balances outstanding under our credit facilities. In December 2009, NFC refinanced its $1.4 billion term loan and
revolving credit facility with an $815 million facility. In June 2010, NFC repaid the $500 million TRIP credit
facility. Cash used in financing activities for the years ended October 31, 2009 and 2008 was $800 million and
$543 million, respectively. The increase in cash used in financing activities was due to an increase in the margin
by which periodic payments on existing secured borrowings exceeded new funding requirements as industry
demand for new vehicle financing declined during 2009.
Credit Markets
The uncertainty and market volatility in capital and credit markets has stabilized substantially compared with
prior years. In November 2009, NFC completed the sale of $350 million of three-year investor notes within the
wholesale note trust funding facility. This sale was eligible for funding under the U.S. Federal Reserve’s TALF
program. In December 2009, NFC renewed its revolving credit and term loan facility with an $815 million, three
49
year facility that matures in December 2012 and also executed a private retail asset sale and signed a secured
loan which generated net proceeds of $304 million. In February 2010, NFC sold $250 million of wholesale floor
plan notes in a two-year transaction to support its dealer inventory funding. This sale was also eligible for
funding under the U.S. Federal Reserve’s TALF program. In June 2010, NFC completed a retail securitization
for $919 million and paid off the TRIP revolving facility. In March 2010, we entered into a three year operating
agreement with GE whereby GE became our preferred source of retail customer financing for equipment offered
by us and our dealers in the U.S. In October 2010, NFC completed a second retail securitization for $290 million
and refinanced three bank conduit facilities, improving both liquidity and borrowing costs.
In October 2010, the Illinois Finance Authority and Cook County, Illinois issued $135 million and $90 million
aggregate principal amount, respectively, of tax-exempt Recovery Zone Facility Bonds. We borrowed the
proceeds of the bonds to support the relocation of our headquarters and the expansion, renovation, and
consolidation of other facilities. The bonds are limited obligations of Cook County and the Illinois Finance
Authority and are payable solely from the payments from the loan agreement and a guarantee from Navistar,
Inc. The numerous recent financing transactions in both private and public markets and our operating agreement
with GE demonstrate our ability to access liquidity. As a result, we continue to believe that we will have
sufficient liquidity to fund our manufacturing and financial services operations, although future borrowings at
our financial services operations could be more costly than in the past.
Debt
See Note 12, Debt, to the accompanying consolidated financial statements for a description of our credit facilities
and long-term debt obligations.
Funding of Financial Services
The Financial Services segment has traditionally obtained the funds to provide financing to our dealers and retail
customers from sales of finance receivables, short and long-term bank borrowings, medium and long-term debt,
and commercial paper in Mexico. As of October 31, 2010, our funding consisted of asset-backed securitization
debt of $1.7 billion, bank borrowings and revolving credit facilities of $974 million, commercial paper of $67
million, and borrowings of $112 million secured by operating and finance leases.
We use a number of SPEs to securitize and sell receivables. Navistar Financial Security Corporation (“NFSC”)
finances wholesale notes, Navistar Financial Retail Receivables Corporation (“NFRRC”) and Navistar Financial
Asset Corp. (“NFASC”) finances retail notes and finance leases, International Truck Leasing Corporation
(“ITLC”) finances operating leases and some finance leases, and Truck Retail Accounts Corporation’s finances
retail accounts. We used TRIP, a $500 million revolving retail warehouse facility, to temporarily fund retail notes
and retail finance leases until the outstanding debt facility matured and was paid in June 2010. The sales of retail
accounts receivable into TRAC constitute sales under GAAP and therefore the sold receivables are removed from
our Consolidated Balance Sheet and the investors’ interests in the interest bearing securities issued to affect the
sale are not recognized as liabilities.
Our Mexican financial services operations include Navistar Financial, S.A. de C.V., Sociedad Financiera de
Objeto Multiple, Entidad No Regulada (“NFM”), and Navistar Comercial S.A. de C.V. which provide vehicle
financing and insurance to our dealers and retail customers in Mexico.
During 2010, NFRRC issued secured notes totaling $1.2 billion. A portion of the proceeds were used to pay-off
certain existing retail secured borrowings and close out the related interest rate swap positions. The remaining
portion was used to pay-off the revolving retail warehouse facility within TRIP of $500 million at maturity on
June 15, 2010. Our securitization arrangements for retail notes and finance leases do not qualify for sales
accounting treatment under the guidance on accounting for transfers and servicing of financial assets and
extinguishments of liabilities. As a result, the transferred receivables and associated secured borrowings are
included on the Consolidated Balance Sheet and no gain or loss is recognized on these transfers.
50
NFSC has in place a master trust agreement with Navistar Financial Dealer Note Master Trust (“Master Trust”),
which was a qualifying special purpose entity (“QSPE”). Effective July 31, 2010, we amended the master trust
agreement with the Master Trust. The amendment disqualified the Master Trust as a QSPE and therefore required
the Master Trust to be evaluated for consolidation as a variable interest entity (“VIE”). As we are the primary
beneficiary of the Master Trust, the Master Trust’s assets and liabilities were consolidated into the assets and
liabilities of the Company. Previously, these securitization transactions were accounted for as sales and
accordingly were not carried on our Consolidated Balance Sheets.
The following table sets forth the utilization under our bank credit and revolving funding facilities in place as of
October 31, 2010:
Company
Instrument Type
(in millions)
NFSC . . . . Revolving wholesale note trust
TRAC . . . Revolving retail account conduit
NFC . . . . . Credit agreement
NFM . . . . Bank lines and commercial paper
Total
Amount
Purpose of Funding
Amount
Utilized Matures or Expires
$ 1,100
Eligible wholesale notes
$
100(A) Eligible retail accounts
811(B) Retail notes and leases, and
general corporate purposes
344 General corporate purposes
600
22
699
295
2011-2012
2011
2012
2011-2016
(A) Exclusive of a subordinated interest in the amount of $53 million.
(B) NFM can borrow up to $100 million, if not used by NFC.
As of October 31, 2010, the aggregate amount available to fund finance receivables under the various facilities
was $739 million.
In November 2009, we completed the sale of $350 million of three-year investor notes within the wholesale note
trust funding facility. This sale was eligible for funding under the U.S. Federal Reserve’s TALF program. In
April 2010, our Variable Funding Certificate (“VFC”) facility was paid off and replaced with the Variable
Funding Note (“VFN”). In August 2010, the VFN was renewed until August 2011. As of October 31, 2010, no
funding was utilized under the VFN.
In February 2010, NFC completed the sale of $250 million of two-year investor notes within the wholesale note
trust funding facility. This sale was also eligible for funding under the TALF program. In addition, in February
2010, NFC paid off investor notes of $212 million upon maturity.
In December 2009, the NFC credit agreement set to mature in July 2010 was refinanced with a $815 million,
three year facility that matures in December 2012, with an interest rate of LIBOR plus 425 basis points. The new
facility contains a term loan of $365 million and a revolving loan of $450 million with a Mexican sub-revolver of
$100 million. Under the new agreement, NFC is subject to customary operational and financial covenants
including an initial minimum collateral coverage ratio of 120%, increasing to 135% effective November 2010,
and 150% effective November 2011. Concurrent with the refinancing, NFASC issued borrowings secured by
asset-backed securities of $225 million and NFC issued a term loan secured by retail notes and leases of $79
million with monthly scheduled principal payments through March 13.
We 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. Under these
agreements, if NFC’s consolidated income before interest expense and income taxes is less than 125% of its
interest expense, NIC or Navistar, Inc. must make income maintenance payments to NFC to achieve the required
ratio. No such payments were required for the year ended October 31, 2010.
51
Derivative Instruments
The Company uses derivative financial instruments as part of our overall interest rate, foreign currency, and
commodity risk management strategies to reduce our interest rate exposure, to potentially increase the return on
invested funds, to reduce exchange rate risk for transactional exposures denominated in currencies other than the
functional currency, and to minimize commodity price volatility. The fair values of these derivatives are recorded
as assets or liabilities on a gross basis in our Consolidated Balance Sheets. For more information on derivatives
and related market risks, see Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and Note 16,
Financial instruments and commodity contracts, to the accompanying consolidated financial statements.
In October 2009, in connection with the sale of the Convertible Notes, the Company purchased call options for
$125 million. The call options cover 11,337,870 shares of common stock, subject to adjustments, at a strike price
of $50.27. The call options are intended to minimize share dilution associated with the Convertible Notes. In
addition, the Company also entered into separate warrant transactions whereby, the Company sold warrants for
$87 million to purchase in the aggregate 11,337,870 shares of common stock, subject to adjustments, at an
exercise price of $60.14 per share of common stock. As the call options and warrants are indexed to our common
stock, we recognized them in permanent equity in Additional paid in capital.
Capital Resources
We expend capital to support our operating and strategic plans. Such expenditures include investments to meet
regulatory and emissions requirements, maintain capital assets, develop new products or improve existing
products, and to enhance capacity or productivity. Many of the associated projects have long lead-times and
require commitments in advance of actual spending.
Business units provide their estimates of costs of capital projects, expected returns, and benefits to senior
management. Those projects are evaluated from the perspective of expected return and strategic importance, with
a goal to maintain annual capital expenditure spending in the $250 million to $350 million range, exclusive of
capital expenditures for equipment leased to others. Additionally, over the next two to three years we anticipate a
temporary increase in capital expenditures (above and beyond the aforementioned range). This temporary
increase is related to the purchase of a new office campus in Lisle, Illinois, which the Company intends to
develop into its’ future headquarters as well as a research and technical center, along with the refurbishment and
enhancement of our facility in Melrose Park, Illinois. The majority of the capital expenditures for these projects
will be financed through Recovery Zone Facility Bonds. See Note 12, Debt, to the accompanying consolidated
financial statements.
Pension and Other Postretirement Benefits
Generally, our pension plans are funded by contributions made by us. 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. At October 31, 2010, we have met all legal funding requirements. We contributed $115 million and
$37 million to our pension plans in 2010 and 2009, respectively.
In August 2006, the Pension Protection Act of 2006 (“PPA”) was signed into law in the U.S. The effective date
of the PPA was deferred until January 2008, subject to a transition period. The PPA increases the funding
requirements for defined benefit pension plans to 100% of the liability and requires unfunded liabilities, or
changes in unfunded liabilities, to be fully funded over a seven-year period. In 2010, the Preservation of Access
to Care for Medicare Beneficiaries and Pension Relief Act of 2010 was signed into law, which provides, among
other things, the ability to reduce and defer required pension contributions. In 2011, we expect to contribute $178
million to meet the minimum required contributions for all plans. We currently expect that from 2012 through
2014, the Company will be required to contribute at least $193 million per year to the plans, depending on asset
performance and discount rates.
52
Other postretirement benefit obligations, such as retiree medical, are primarily funded in accordance with a 1993
legal agreement (the “Settlement Agreement”) between us, our employees, retirees, and collective bargaining
organizations, which eliminated certain benefits provided prior to that date and provided for cost sharing between
us and participants in the form of premiums, co-payments, and deductibles. Our contributions totaled $2 million
and $3 million in 2010 and 2009, respectively. We expect to contribute $2 million to our other post-employment
benefit plans during 2011.
As part of the Settlement Agreement, a Base Program Trust was established in June 1993 to provide a vehicle for
funding the health care liability through our contributions and retiree premiums. A separate independent Retiree
Supplemental Benefit Program was also established, which included our contribution of Class B Common Stock,
originally valued at $513 million, to potentially reduce retiree premiums, co-payments, and deductibles and
provide additional benefits in subsequent periods. In addition to the base plan fund, we are contingently obligated
to make profit sharing contributions to the Retiree Supplemental Benefit Trust to potentially improve upon the
basic benefits provided through the base plan fund. These profit sharing contributions are determined by means
of a calculation as established through the Settlement Agreement. There were no profit sharing contributions to
the Retiree Supplemental Benefit Trust during the three years ended October 31, 2010.
The funded status of our plans is derived by subtracting the actuarially-determined present value of the projected
benefit obligations at year end from the end of year fair value of plan assets.
There was no significant change in the under-funded status of our pension plans during 2010 due to better than
expected asset returns during the fiscal year offset by a decrease in the discount rates used to determine the
present value of the projected benefit obligations. Our actual return on assets during 2010 was approximately
17% for the U.S. Pension plans. The weighted average discount rate used to measure the PBO was 4.8% at
October 31, 2010 compared to 5.4% at October 31, 2009.
The under-funded status of our health and life insurance benefits decreased by $505 million primarily due to an
administrative change to the prescription drug program affecting plan participants who are Medicare eligible as
well as the impact of health care reform. However, the favorable impact was offset by the decrease in discount
rates mentioned above.
Off-Balance Sheet Arrangements
We enter into various arrangements not recognized in our Consolidated Balance Sheets that have or could have
an effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. The
principal off-balance sheet arrangements that we enter into are guarantees and sales of receivables. The following
discussions address each of these items:
Guarantees
We occasionally provide guarantees that could obligate us to make future payments if the primary entity fails to
perform under its contractual obligations. These include residual value guarantees, stand-by letters of credit and
surety bonds, credit and purchase commitments and indemnifications. We have recognized liabilities for some of
these guarantees in our Consolidated Balance Sheets as they meet recognition and measurement provisions. In
addition to the liabilities that have been recognized, we are contingently liable for other potential losses under
various guarantees. 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. For more information, see Note 17,
Commitments and contingencies, to the accompanying consolidated financial statements.
Sales of Receivables
Our financial services operations typically sell, for legal purposes, our finance receivables to third parties while
continuing to service the receivables thereafter. In these securitization transactions, we transfer receivables to a
bankruptcy remote Special Purpose entity (“SPE”). The SPE then transfers the receivables to a legally isolated
53
entity that is typically a trust or a conduit, which then issues asset-backed securities to investors. For accounting
purposes, our transfers of retail accounts receivables are treated as sales; our transfers of other receivables are
treated as secured borrowings. We record sales by removing receivables from the Consolidated Balance Sheet
and recording gains and losses in Finance revenues.
Effective July 31, 2010, our Financial Services segment amended the wholesale trust agreement with the Master
Trust. The amendment disqualified the Master Trust as a QSPE and therefore required the Master Trust to be
evaluated for consolidation as a VIE. As we are the primary beneficiary of the Master Trust, the Master Trust’s
assets and liabilities are consolidated into the assets and liabilities of the Company. As a result of the amendment,
we recognized $337 million of receivables at fair value, net of intercompany eliminations and retained interests
previously carried on our Consolidated Balance Sheet. Previously, transfers of wholesale notes to the Master
Trust were accounted for as sales and accordingly were not carried on our Consolidated Balance Sheets.
We use the Master Trust, which provides for the funding of eligible wholesale notes through investor notes and
VFN. The Master Trust owned $700 million of wholesale notes and $29 million of cash equivalents as of
October 31, 2010 and $763 million of wholesale notes as of October 31, 2009. This includes $62 million and $96
million of wholesale notes with our Dealcors as of October 31, 2010 and October 31, 2009, respectively. Funding
certificates in the total amount of $1.1 billion and $862 million respectively, as of October 31, 2010 and 2009
were available to fund the receivables, and the trust had $600 million and $562 million of outstanding
borrowings as of October 31, 2010 and 2009, respectively. We carried retained interests of $192 million as of
October 31, 2009, in Finance receivables, net.
We use another SPE, TRAC, that utilizes a $100 million conduit funding arrangement, which provides for
funding of eligible accounts receivable. The SPE owned $54 million of retail accounts and $21 million of cash
equivalents as of October 31, 2010, and $89 million of retail accounts and $20 million of cash equivalents as of
October 31, 2009. The SPE had $22 million and $8 million of outstanding borrowings as of October 31, 2010 and
2009, respectively. We have retained interests of $53 million and $100 million as of October 31, 2010 and 2009,
which are recorded in Finance receivables, net. In total, proceeds from the sales of retail notes and wholesale
notes that were accounted for as sales and accordingly not carried on the Consolidated Balance Sheet amounted
to $3.5 billion, $4.2 billion, and $4.5 billion in 2010, 2009, and 2008, respectively.
Contractual Obligations
The following table provides aggregated information on our outstanding contractual obligations as of October 31,
2010:
Payments Due by Year Ending October 31,
Total
2011
2012-
2013
2014-
2015
2016 +
(in millions)
Type of contractual obligation:
Long-term debt obligations . . . . . . . . . . . . . . . . . . . . . . . .
Interest on long-term debt(A) . . . . . . . . . . . . . . . . . . . . . . . .
Financing arrangements and capital lease obligations(B) . .
Operating lease obligations(C) . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations(D) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
4,777
1,693
236
268
106
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,080
$
529
205
110
51
83
978
$
$
1,905
337
101
83
18
961
236
21
62
—
$
1,382
915
4
72
5
$
2,444
$ 1,280
$
2,378
(A) Amounts represent estimated contractual interest payments on outstanding debt. Rates in effect as of October 31, 2010 are used for
variable rate debt. For more information, see Note 12, Debt, to the accompanying consolidated financial statements.
(B) We lease many of our facilities as well as other property and equipment under financing arrangements and capital leases in the normal
course of business including $15 million of interest obligation. For more information, see Note 8, Property and equipment, net, to the
accompanying consolidated financial statements.
54
(C) Lease obligations for facility closures are included in operating leases. Future operating lease obligations are not recognized in our
Consolidated Balance Sheet. For more information, see Note 8, Property and equipment, net, to the accompanying consolidated financial
statements.
(D) Purchase obligations include various commitments in the ordinary course of business that would include the purchase of goods or
services and they are not recognized in our Consolidated Balance Sheet.
Due to the uncertainty with respect to the timing of cash payments associated with the settlement of audits with
taxing authorities because of existing net operating loss carry forwards, the preceding table excludes uncertain
tax positions of $91 million. We do not expect to make significant payments of these liabilities within the next
year. For further information, see Note 14, Income taxes, to the accompanying consolidated financial statements.
In addition to the above contractual obligations, we are also required to fund our pension plans in accordance
with the requirements of the PPA. As such, we expect to contribute $178 million in 2011 to meet the minimum
required contributions for all plans. We currently expect that from 2012 through 2014, the Company will be
required to contribute at least $193 million to the plans per year depending on asset performance and discount
rates in the next several years. For additional information, see Note 13, Postretirement benefits, to the
accompanying consolidated financial statements.
Other Information
Income Taxes
We file a consolidated U.S. federal income tax return for NIC and its eligible domestic subsidiaries. Our
non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes
under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and tax benefit carry forwards. Deferred tax liabilities and
assets at the end of each period are determined using enacted tax rates.
A valuation allowance is required to be established or maintained when, based on currently available information
and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The
guidance on accounting for income taxes provides that important factors in determining whether a deferred tax
asset will be realized are whether there has been sufficient taxable income in recent years and whether sufficient
income is expected in future years in order to utilize the deferred tax asset. Based on our review of historical
operating results and future income projections and considering the uncertainty of the U.S. and Canadian
economy, we determined that it was more likely than not that we would not be able to realize the value of our
deferred tax assets attributable to U.S. and Canadian operations. We therefore continue to maintain a valuation
allowance against such U.S. and Canadian assets. However, it is reasonably possible within the next twelve
months that the Company may release all or a portion of its U.S. valuation allowance if U.S. operations continue
to improve.
We believe that our evaluation of deferred tax assets and our maintenance of a valuation allowance against such
assets involve critical accounting estimates because they are subject to, among other things, estimates of future
taxable income in the U.S. and in other non-U.S. tax jurisdictions. These estimates are susceptible to change and
dependent upon events that may or may not occur, and accordingly, our assessment of the valuation allowance is
material to the assets reported on our Consolidated Balance Sheet and changes in the valuation allowance may be
material to our results of operations. We intend to continue to assess our valuation allowance in accordance with
the guidance on accounting for income taxes.
The guidance on accounting for uncertainty in income taxes addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the
guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on the
largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
55
The guidance on accounting for uncertainty in income taxes also provides guidance on de-recognition and
classification, and requires companies to elect and disclose their method of reporting interest and penalties on
income taxes. We recognize interest and penalties related to uncertain tax positions as part of Income tax
expense. Total interest and penalties related to our uncertain tax positions are immaterial.
As of October 31, 2010 and October 31, 2009, the net amount of liability for uncertain tax provisions was $91
million and $139 million ($104 million and $150 million on a gross basis), respectively. If these unrecognized
tax benefits are recognized, all but $10 million 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 carry forward, which would be offset by a
full valuation allowance. While it is probable that the liability for unrecognized tax benefits may increase or
decrease during the next twelve months, we do not expect any such change would have a material effect on our
financial condition, results of operations, or cash flows.
Environmental Matters
We have been named a 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.
Four sites formerly owned by us, (i) Solar Turbines in San Diego, California, (ii) the West Pullman Plant in
Chicago, Illinois, (iii) the Canton Plant in Canton, Illinois, and (iv) the Wisconsin Steel in Chicago, Illinois, were
identified as having soil and groundwater contamination. Two sites in Sao Paulo, Brazil, where (i) we are
currently operating and (ii) we previously had operations, were identified as having soil and groundwater
contamination. On October 14, 2010, the Illinois EPA issued a No further Remediation letter for West Pullman
Plant, signifying that all appropriate remediation work at the site has been completed. While investigations and
cleanup activities continue at all other sites, we believe that we have adequate accruals to cover costs to complete
the cleanup of these 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. On May 21, 2010, President Obama directed the EPA Agency and the
Department of Transportation to adopt rules by July 30, 2011 setting greenhouse gas emission and fuel economy
standards for medium and heavy-duty vehicles beginning with model year 2014. EPA and NHTSA issued
proposed rules on November 30, 2010. These standards will impact development costs for vehicles and engines
as well as the cost of vehicles and engines. Our facilities may also be subject to regulation related to climate
change.
These truck standards may also create opportunities for the Company, which has pursued the development of
hybrid and electric vehicles and has sought incentives for the development of technology to improve fuel
economy. Costs related to these regulatory proposals cannot be quantified at present because the regulatory
proposals themselves largely remain in the early stages. We are active participants in the discussions surrounding
56
the development of these regulations. Climate change may also have some impact on the Company’s
operations. However, these impacts are currently uncertain and the Company cannot predict the nature and scope
of those impacts.
Securitization Transactions
We finance receivables using a process commonly known as securitization, whereby asset-backed securities are
sold via public offering or private placement. In a typical securitization transaction, we transfer a pool of finance
receivables to bankruptcy remote SPE. The SPE then transfers the receivables to a legally isolated entity,
generally a trust or a conduit, in exchange for securities of the trust which are then retained or sold into the public
market or privately placed. These securities are issued by the trust and are secured by future collections on the
receivables sold to the trust. These transactions are subject to the provisions of the guidance on accounting for
transfers and servicing financial assets and extinguishment of liabilities.
When we securitize receivables, we may have retained interests in the receivables sold (transferred). The retained
interests may include senior and subordinated securities, undivided interests in receivables and over-
collateralizations, restricted cash held for the benefit of the trust, and interest-only strips. Our retained interests
are the first to absorb any credit losses on the transferred receivables because we have the most subordinated
interests in the trust, including subordinated securities, the right to receive excess spread (interest-only strip), and
any residual or remaining interests of the trust after all asset-backed securities are repaid in full. Our exposure to
credit losses on the transferred receivables is limited to our retained interests. The SPE’s assets are available to
satisfy the creditors’ claims against the assets prior to such assets becoming available for the SPE’s own uses or
the uses of our affiliated companies. Since the transfer constitutes a legal sale, we are under no obligation to
repurchase any transferred receivable that becomes delinquent in payment or otherwise is in default. We are not
responsible for credit losses on transferred receivables other than through our ownership of the lowest tranches in
the securitization structures. We do not guarantee any securities issued by trusts.
We, as seller and the servicer of the finance receivables, are obligated to provide certain representations and
warranties regarding the receivables. Should any of the receivables fail to meet these representations and
warranties, we, as servicer, are required to repurchase the receivables.
Most of our wholesale notes, retail notes and finance leases securitization arrangements do not qualify for sales
accounting treatment under the guidance on accounting for transfers and servicing of financial assets and
extinguishment of liabilities. As a result, such sold receivables and associated secured borrowings are included
on the Consolidated Balance Sheet and no gain or loss is recognized for these transactions. For those that do
qualify under the accounting guidance, gains or losses are reported in Finance revenues.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation
of our consolidated financial statements, we use estimates and make judgments and assumptions about future
events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. Our
assumptions, estimates, and judgments are based on historical experience, current trends, and other factors we
believe are relevant at the time we prepare our consolidated financial statements.
Our significant accounting policies are discussed in Note 1, Summary of significant accounting policies, to the
accompanying consolidated financial statements and should be reviewed in connection with the following
discussion. We believe that the following policies are the most critical to aid in fully understanding and
evaluating our reported results as they require us to make difficult, subjective, and complex judgments. In
determining whether an estimate is critical, we consider if:
•
•
The nature of the estimates or assumptions is material due to the levels of subjectivity and judgment
necessary to account for highly uncertain matters or the susceptibility of such matters to change.
The impact of the estimates and assumptions on financial condition or operating performance is material.
57
Pension and Other Postretirement Benefits
We provide pension and other postretirement benefits to a substantial portion of our employees, former
employees, and their beneficiaries. The assets, liabilities, and expenses we recognize and disclosures we make
about plan actuarial and financial information are dependent on the assumptions used in calculating such
amounts. The primary assumptions include factors such as discount rates, health care cost trend rates, inflation,
expected return on plan assets, retirement rates, mortality rates, rate of compensation increases, and other factors
including management’s plans regarding plant rationalization activities. Changes to our business environment
could result in changes to the assumptions, the effects of which could be material.
•
•
•
•
•
Plant rationalization activities impact the determination of whether a plan curtailment or settlement has
occurred. Key considerations include, but are not limited to, expected future service credit, the remaining
years of recall rights of the workforce, and the extent to which minimum service requirements (in the case
of healthcare benefits) have been met.
The discount rates are obtained by matching the anticipated future benefit payments for the plans to the
Citigroup yield curve to establish a weighted average discount rate for each plan.
Health care cost trend rates are developed based upon historical retiree cost trend data, short term health
care outlook, and industry benchmarks and surveys. The inflation assumptions used are based upon both our
specific trends and nationally expected trends.
The expected return on plan assets is derived from historical plan returns, expected long-term performance
of asset classes, asset allocations, input from an external pension investment advisor, and risks and other
factors adjusted for our specific investment strategy. The focus is on long-term trends and provides for the
consideration for recent plan performance.
Retirement rates are based upon actual and projected plan experience.
• Mortality rates are developed from actual and projected plan experience.
•
The rate of compensation increase reflects our long-term actual experience and our projected future
increases including contractually agreed upon wage rate increases for represented employees.
The sensitivities stated below are based upon changing one assumption at a time, but often economic factors
impact multiple assumptions simultaneously.
(in millions)
Discount rate
Increase of 1.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease of 1.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on assets
Increase of 1.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease of 1.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
October 31, 2010
2010 Expense
Obligations
Pension
OPEB
Pension OPEB
$
(347) $
374
(103) $
114
(4) $
—
4
1
NA
NA
NA
NA
(24)
24
(5)
5
Allowance for Doubtful Accounts
The Allowance for doubtful accounts for finance receivables is established through a charge to the Provision for
credit losses. The allowance is an estimate of the amount required to absorb probable losses on the existing
portfolio of finance receivables that may become uncollectible. Finance receivables are charged off to the
Allowance for losses when amounts due from the customers are determined to be uncollectible. The estimate of
the required allowance is based upon three factors: (i) a historical component based upon a weighted average of
actual loss experience from the most recent three years, (ii) a qualitative component based upon current
economic and portfolio quality trends, and (iii) a specific reserve component. The qualitative component is the
58
result of analysis of asset quality trend statistics from the most recent four quarters. In addition, we also analyze
specific economic indicators such as tonnage, fuel prices, and gross domestic product for additional insight into
the overall state of the economy and its potential impact on our portfolio. The actual losses related to the retail
notes, wholesale note and finance leases portfolio are also stratified by customer types to reflect the differing loss
statistics for each. To the extent that our judgments about these risk factors and conditions are not accurate, an
adjustment to our allowance for losses may materially impact our results of operations or financial condition. If
we were to apply a hypothetical increase and decrease of ten basis points to the historical loss rate used in
calculating the allowance for losses, the required allowance, as of October 31, 2010, would increase from
$77 million to $83 million or decrease to $70 million.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences between the
financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax
assets are also recorded with respect to net operating losses and other tax attribute carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the years in which temporary differences
are expected to be recovered or settled. Valuation allowances are established when it is more likely than not that
deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the income of the period that includes the enactment date.
The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income
and other factors such as the taxing jurisdiction in which the asset is to be recovered. A high degree of judgment
is required to determine if, and the extent that, valuation allowances should be recorded against deferred tax
assets. We have provided valuation allowances at October 31, 2010 and 2009 aggregating $1.8 billion and
$2.1 billion, respectively, against such assets based on our assessment of past operating results, estimates of
future taxable income, and the feasibility of tax planning strategies. Of these amounts, $49 million relate to net
operating losses for which subsequently recognized tax benefits will be allocated to additional paid in capital.
Although we believe that our approach to estimates and judgments as described herein is reasonable, actual
results could differ and we may be exposed to increases or decreases in income taxes that could be material. If
U.S. operations continue to improve, we believe it is possible within the next twelve months that the Company
may release all or a portion of its U.S. valuation allowance.
We follow the guidance on accounting for uncertainty in income taxes, which addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial
statements. Under the guidance, we recognize the tax benefit from an uncertain tax position if it is more likely
than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits
of the position. The tax benefits recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
The guidance on accounting for uncertainty in income taxes also provides guidance on de-recognition and
classification, and requires companies to elect and disclose their method of reporting interest and penalties on
income taxes. We recognize interest and penalties related to uncertain tax positions as part of Income tax
expense.
As of October 31, 2010 and October 31, 2009, the amount of liability for uncertain tax provisions was $91
million and $139 million ($104 million and $150 million on a gross basis), respectively. If these unrecognized
tax benefits are recognized, all but $10 million would impact our effective tax rate. However, to the extent we
continue to maintain a full valuation allowance against our deferred tax assets, the impact may be in the form of
an increase in the deferred tax asset related to our NOL carry forward, which would be offset by a full valuation
allowance. While it is probable that the liability for unrecognized tax benefits may increase or decrease during
the next twelve months, we do not expect any such change would have a material effect on our financial
condition, results of operations, or cash flows.
59
Impairment of Long-Lived Assets
We test long-lived assets or asset groups (other than goodwill and intangible assets with indefinite lives as
discussed below) for recoverability when events and circumstances indicate that the carrying value of an asset or
asset group may not be recoverable. Estimates of future cash flows used to test the recoverability of a long-lived
asset or asset group include only the future cash flows that are directly associated with and that are expected to
arise as a direct result of the use and eventual disposition of the asset or asset group. If the asset or asset group is
determined to not be recoverable, an impairment loss is measured as the amount by which the carrying amount of
the long-lived asset or asset group exceeds its fair value.
Our impairment loss calculations require us to apply judgments in estimating future cash flows and asset fair
values. This judgment includes developing cash flow projections and assessing probability weightings to certain
business scenarios. Other assets could become impaired in the future or require additional charges as a result of
declines in profitability due to changes in volume, market pricing, cost, manner in which an asset is used,
physical condition of an asset, laws and regulations, or the business environment. Significant adverse changes to
our business environment and future cash flows could cause us to record additional impairment charges in future
periods, which could be material.
Goodwill
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to the net assets.
Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or if an event
occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its
carrying amount.
Goodwill is tested for impairment based on a two-step test. The first step, used to identify potential impairment,
compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a
reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the
second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair
value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment
loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount
of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss shall be recognized in an amount equal to that excess.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing
cash flow projections, selecting appropriate discount rates, identifying relevant market comparables,
incorporating general economic and market conditions, and selecting an appropriate control premium. The
income approach is based on discounted cash flows which are derived from internal forecasts and economic
expectations for each respective reporting unit. In 2010, we did not recognize any material goodwill impairments.
However, we could recognize goodwill impairment charges in the future if we have declines in profitability due
to changes in volume, market pricing, cost, or the business environment. Significant adverse changes to our
business environment and future cash flows could cause us to record impairment charges in future periods, which
could be material.
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 intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess.
60
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. We could recognize impairment
charges in the future as a result of declines in the fair values of our indefinite lived assets, which could be
material.
Contingency Accruals
Product liability lawsuits and claims
We are subject to product liability lawsuits and claims in the normal course of business. We record product
liability accruals for the self-insured portion of any pending or threatened product liability actions.
We obtain a third-party actuarial analysis to assist with the determination of the expected ultimate losses for
claims and consequently the related reserve on our Consolidated Balance Sheet. The actual settlement values of
outstanding claims in the aggregate may differ from these estimates due to many circumstances including but not
limited to the discovery and evolution of information related to individual claims, changes in the legal and
regulatory environment, product development trends, and changes in the frequency and/or severity of claims
relative to historical experience.
The reserve for product liability was $46 million as of October 31, 2010 and a hypothetical 10% change in claim
amount would increase or decrease this accrual by $5 million.
Environmental remediation matters
We are subject to claims by various governmental authorities regarding environmental remediation matters.
With regard to environmental remediation, many factors are involved including interpretations of local, state, and
federal laws and regulations, and whether wastes or other hazardous material are contaminating the surrounding
land or water or have the potential to cause such contamination.
As of October 31, 2010, we have accrued $21 million for environmental remediation. Although we believe that
the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed
to increases or decreases in our accrual that could be material.
Asbestos claims
We are subject to claims related to illnesses alleged to have resulted from asbestos exposure from component
parts found in older vehicles, although some claims relate to the alleged presence of asbestos in our facilities.
Numerous factors including tort reform, jury awards, and the number of other solvent companies identified as
co-defendants will impact the number of claims filed against the Company.
The estimate of the asbestos liability is subject to uncertainty. Such uncertainty includes some reliance on
industry data to project the future frequency of claims received by us, the long latency period associated with
asbestos exposures and the types of diseases that will ultimately manifest, and unexpected future inflationary
trends. Historically, actual damages paid out to individual claimants have not been material. Although we believe
that our estimates and judgments related to asbestos related claims are reasonable, actual results could differ and
we may be exposed to increases or decreases in our accrual that could be material.
Product Warranty
We record a liability for standard and extended warranty for products sold as well as for certain claims outside
the contractual obligation period. As a result of the uncertainty surrounding the nature and frequency of product
61
recall programs, the liability for such programs is recorded when we commit to a recall action, which generally
occurs when it is announced. When collection is reasonably assured, we also estimate and recognize the amount
of warranty claim recoveries to be received from our suppliers.
Product warranty estimates are established using historical information about the nature, frequency, and average
cost of warranty claims. Initial warranty estimates for new model year products are based on the previous model
year product’s warranty experience until the product progresses through its life cycle and related claims data
becomes mature. Warranty claims are influenced by factors such as new product introductions, technological
developments, the competitive environment, and the costs of component parts. Recent emissions standards have
resulted in rapid product development cycles and have included significant changes from previous engine
models. We estimate warranty claims and take action to improve vehicle quality and minimize warranty claims.
Actual payments for warranty claims could differ from the amounts estimated requiring adjustments to the
liabilities in future periods.
Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ
and we may be exposed to increases or decreases in our warranty accrual that could be material.
Recently Issued Accounting Standards
Accounting guidance issued by various standard setting and governmental authorities that have not yet become
effective with respect to our consolidated financial statements are described below, together with our assessment
of the potential impact they may have on our consolidated financial statements:
In July 2010, the Financial Accounting Standards Board (“FASB”) issued new guidance regarding disclosures
about the credit quality of financing receivables and the allowance for credit losses. The guidance will require
disaggregated information about the credit quality of financing receivables and the allowance for credit losses
based on portfolio segment and class, as well as disclosure of credit quality indicators, past due information, and
modifications of financing receivables. The disclosures as of the end of a reporting period are effective for
interim and annual reporting periods ending on or after December 15, 2010. Our effective date is the period
ending January 31, 2011. The disclosures about activity that occurs during a reporting period are effective for
interim and annual reporting periods beginning on or after December 15, 2010. Our effective date is the period
beginning February 1, 2011. When effective, we will comply with the disclosure provisions of this guidance.
In January 2010, the FASB issued new guidance regarding disclosures about fair value measurements. The
guidance requires new disclosures related to activity in Level 3 fair value measurements. This guidance requires
purchases, sales, issuances, and settlements to be presented separately in the rollforward of activity in Level 3
fair value measurements and is effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Our effective date is November 1, 2011. When effective, we will comply with
the disclosure provisions of this guidance.
In June 2009, the FASB issued new guidance on accounting for transfers of financial assets. The guidance
eliminates the concept of a QSPE, changes the requirements for derecognizing financial assets, and requires
additional disclosures in order to enhance information reported to users of financial statements by providing
greater transparency about transfers of financial assets, including securitization transactions, and an entity’s
continuing involvement in and exposure to the risks related to transferred financial assets. This guidance is
effective for fiscal years beginning after November 15, 2009. Our effective date is November 1, 2010. Upon
adoption, future transfers of finance receivables from our financial services segment to the TRAC funding
conduit will no longer receive sale accounting treatment. The adoption is not expected to have a material impact
on our consolidated financial statements.
In June 2009, the FASB issued new guidance regarding the consolidation of VIEs. The guidance also amends the
determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to
consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative
62
analysis will include, among other things, consideration of who has the power to direct the activities of the entity
that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or
the right to receive benefits of the VIE that could potentially be significant to the VIE. This guidance also
requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Prior guidance
required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events
had occurred. QSPEs, which were previously exempt from the application of this guidance, will be subject to the
provisions of this guidance when it becomes effective. The guidance also requires enhanced disclosures about an
enterprise’s involvement with a VIE. This guidance is effective for the first annual reporting period beginning
after November 15, 2009 and for interim periods within that first annual reporting period. Our effective date is
November 1, 2010. We do not expect the adoption of this guidance will have a material impact on our
consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risks include fluctuations in interest rates and currency exchange rates. We are also exposed
to changes in the prices of commodities used in our manufacturing operations. Commodity price risk related to
our current commodity financial instruments are not material. We do not hold a material portfolio of market risk
sensitive instruments for trading purposes.
We have established policies and procedures to manage sensitivity to interest rate and foreign currency exchange
rate market risk. These procedures include the monitoring of our level of exposure to each market risk, the
funding of variable rate receivables primarily with variable rate debt, and limiting the amount of fixed rate
receivables that may be funded with floating rate debt. These procedures also include the use of derivative
financial instruments to mitigate the effects of interest rate fluctuations and to reduce our exposure to exchange
rate risk.
Interest rate risk
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. We
measure our interest rate risk by estimating the net amount by which the fair value of all of our interest rate
sensitive assets and liabilities would be impacted by selected hypothetical changes in market interest rates. Fair
value is estimated using a discounted cash flow analysis. At October 31, 2010 and 2009, the net fair value of our
liabilities with exposure to interest rate risk was $6.0 billion and $5.2 billion, respectively. Assuming a
hypothetical instantaneous 10% adverse change in interest rates as of October 31, 2010 and 2009, the fair value
of these liabilities would increase by $38 million and $79 million, respectively. At October 31, 2010 and 2009,
the net fair value of our assets with exposure to interest rate risk was $3.5 billion and $3.4 billion, respectively.
Assuming a hypothetical instantaneous 10% adverse change in interest rates as of October 31, 2010 and 2009, the
fair value of these assets would decrease by $22 million and $31 million, respectively. Our 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.
Commodity price risk
We are exposed to changes in the prices of commodities, particularly for aluminum, copper, precious metals,
resins, diesel fuel, and steel and their impact on the acquisition cost of various parts used in our manufacturing
operations. We have been able to mitigate the effects of price increases via a combination of design changes,
material substitution, resourcing, global sourcing, and price performance. In certain cases, we use derivative
instruments to reduce exposure to price changes. During 2010, we purchased approximately $485 million of
commodities subject to market risk. Assuming a hypothetical instantaneous 10% adverse change in commodity
pricing during 2010, we would have incurred an additional $48 million of costs. Commodity price risk associated
with our derivative position at October 31, 2010 and 2009 is not material to our operating results or financial
position.
63
Foreign currency risk
Foreign currency risk is the risk that we will incur economic losses due to adverse changes in foreign currency
exchange rates. Our primary exposures to foreign currency exchange fluctuations are the Canadian dollar/
U.S. dollar, Mexican peso/U.S. dollar, Euro/U.S. dollar, and Brazilian real/U.S. dollar. At October 31, 2010 and
2009, the net fair value of our liabilities with exposure to foreign currency risk was $56 million and $92 million,
respectively. Assuming that no offsetting derivative financial instruments exist, 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 $6 million at October 31, 2010. At October 31, 2010 and 2009,
the net fair value of our assets with exposure to foreign currency risk was $140 million and $146 million,
respectively. Assuming that no offsetting derivative financial instruments exist, 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 $14 million at October 31, 2010.
For further information regarding models, assumptions and parameters related to market risk, please see Note 15,
Fair value measurements, and Note 16, Financial instruments and commodity contracts, to the accompanying
consolidated financial statements.
64
Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended October 31, 2010, 2009, and 2008 . . . . . . . . . .
Consolidated Balance Sheets as of October 31, 2010 and 2009 (Revised) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended October 31, 2010, 2009, and 2008 . . . . . . . . . .
Consolidated Statements of Stockholders’ Deficit for the years ended October 31, 2010, 2009 (Revised),
Page
66
67
68
69
and 2008 (Revised) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
Notes to Consolidated Financial Statements
Summary of significant accounting policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Ford settlement and related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Acquisition and disposal of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
9
Impairment of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10 Goodwill and other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
Investments in and advances to non-consolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13 Postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15 Fair value measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16 Financial instruments and commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17 Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18 Segment reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19 Stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20 Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21 Stock-based compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22 Supplemental cash flow information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23 Condensed consolidating guarantor and non-guarantor financial information . . . . . . . . . . . . . . . . . . . . .
24 Selected quarterly financial data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
88
89
90
93
94
98
99
100
101
103
105
112
121
124
128
131
137
140
142
142
148
148
155
65
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Navistar International Corporation:
We have audited the accompanying Consolidated Balance Sheets of Navistar International Corporation and
subsidiaries (the Company) as of October 31, 2010 and 2009, and the related Consolidated Statements of
Operations, Stockholders’ Deficit, and Cash Flows for each of the years in the three-year period ended
October 31, 2010. We also have audited Navistar International Corporation’s internal control over financial
reporting as of October 31, 2010, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing
under Item 9A(c) of the Company’s October 31, 2010 annual report on Form 10-K. Our responsibility is to
express an opinion on these consolidated financial statements and an opinion on the Company’s internal control
over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Navistar International Corporation and subsidiaries as of October 31, 2010 and 2009, and
the results of their operations and their cash flows for each of the years in the three-year period ended
October 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the
Company has maintained, in all material respects, effective internal control over financial reporting as of
October 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by COSO.
As described in Note 1 and Note 11 to the accompanying consolidated financial statements, the Company
adopted new guidance on the accounting for convertible debt instruments as of November 1, 2009. Also, as
described in Note 1 to the accompanying consolidated financial statements, the Company adopted new guidance
on noncontrolling interests as of November 1, 2009.
/s/ KPMG LLP
Chicago, Illinois
December 21, 2010
66
Navistar International Corporation and Subsidiaries
Consolidated Statements of Operations
For the Years Ended October 31,
2010
2009
2008
(in millions, except per share data)
Sales and revenues
Sales of manufactured products, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Finance revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,926 $
219
11,300 $
269
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,145
11,569
Costs and expenses
Costs of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Engineering and product development costs . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expenses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,741
(15)
—
1,406
464
253
(44)
9,366
59
31
1,344
433
251
(228)
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in (loss) income of non-consolidated affiliates . . . . . . . . . . . . . . . . . .
11,805
(50)
11,256
46
Income before income tax and extraordinary gain . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to non-controlling interests . . . . . . . . . . . . . . .
290
23
267
—
267
44
359
37
322
23
345
25
Net income attributable to Navistar International Corporation . . . . . . . $
223 $
320 $
Basic earnings per share:
Income attributable to Navistar International Corporation before
extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Navistar International Corporation . . . $
3.11 $
—
3.11 $
4.18 $
0.33
4.51 $
Diluted earnings per share:
Income attributable to Navistar International Corporation before
extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Navistar International Corporation . . . $
3.05 $
—
3.05 $
4.14 $
0.32
4.46 $
Weighted average shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71.7
73.2
71.0
71.8
14,399
325
14,724
11,942
—
358
1,437
384
469
14
14,604
71
191
57
134
—
134
—
134
1.89
—
1.89
1.82
—
1.82
70.7
73.2
See Notes to Consolidated Financial Statements
67
Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
(in millions, except per share data)
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade and other receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade and other receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in and advances to non-consolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of October 31,
2010
2009
(Revised)(A)
$
585
586
987
1,770
1,568
83
256
5,835
180
44
1,145
103
1,442
324
262
63
332
1,212
—
855
1,706
1,666
107
202
5,748
485
26
1,498
62
1,467
318
264
57
103
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
9,730
$
10,028
LIABILITIES, REDEEMABLE EQUITY SECURITIES AND STOCKHOLDERS’ DEFICIT
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ deficit
Series D convertible junior preference stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock ($0.10 par value per share, 110.0 shares authorized, 75.4 shares issued at both
dates)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock held in treasury, at cost (3.6 and 4.7 shares, at the respective dates) . . . . . . . . . . . . . .
Total stockholders’ deficit attributable to Navistar International Corp . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity attributable to non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
632
1,827
1,130
3,589
4,238
2,097
142
588
1,136
1,872
1,177
4,185
4,156
2,595
142
624
10,654
8
11,702
13
4
4
7
2,206
(1,878)
(1,196)
(124)
(981)
49
(932)
7
2,181
(2,101)
(1,690)
(149)
(1,748)
61
(1,687)
Total liabilities, redeemable equity securities, and stockholders’ deficit . . . . . . . . . . . . . . . . . . . .
$
9,730
$
10,028
(A) Revised; See Note 1, Summary of significant accounting policies
See Notes to Consolidated Financial Statements
68
Navistar International Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to cash provided by operating activities:
$
267
$
345
$
134
For the Years Ended October 31,
2010
2009
2008
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation of equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of property and equipment, goodwill, and intangible assets . . . . . . . .
Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in loss/income of affiliated companies, net of dividends . . . . . . . . . . . . . . .
Other non-cash operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, exclusive of the effects of businesses
acquired and disposed:
Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales or maturities of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in and advances to non-consolidated affiliates . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business acquisitions, net of escrow received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities
Proceeds from issuance of securitized debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on securitized debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of non-securitized debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on non-securitized debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in notes and debt outstanding under revolving credit
facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments under financing arrangements and capital lease obligations . . . . . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Call options and warrants, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to non-controlling interest
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash and cash equivalents upon consolidation of Blue Diamond Parts and
Blue Diamond Truck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See Notes to Consolidated Financial Statements
69
265
51
17
—
38
24
29
55
61
(136)
546
122
(72)
(160)
1,107
(1,876)
1,290
515
(234)
(45)
23
(97)
7
(2)
(15)
—
(434)
1,460
(1,579)
687
(883)
(866)
(62)
(35)
—
—
35
(57)
(1,300)
—
(627)
288
56
(18)
41
16
16
50
13
54
197
391
135
(204)
(142)
1,238
(382)
384
71
(151)
(46)
6
(44)
10
(60)
—
—
(212)
329
64
56
372
15
15
65
14
49
(352)
614
(221)
339
(373)
1,120
(42)
46
(143)
(176)
(39)
20
(17)
20
—
—
(2)
(333)
349
(1,191)
1,868
(1,793)
1,076
(1,725)
104
(64)
159
(42)
(40)
(29)
(38)
13
(20)
(764)
9
271
(18)
(67)
(11)
—
—
29
—
(676)
(27)
84
—
777
861
—
1,212
585
$
80
861
$ 1,212
$
Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Deficit
Series D
Convertible
Junior
Preference
Stock
Common
Stock
Additional
Paid in
Capital
Compre-
hensive
Income
(Loss)
Accumulated
Deficit
Accumulated
Other
Compre-
hensive
Loss
Common
Stock
Held in
Treasury,
at Cost
Stock-
holders
Equity
attributable
to Non-
controlling
interests
Total
(Revised)
(A)
(Revised)
(A)
(Revised)
(A)
(Revised)
(A)
(Revised)
(A)
(Revised)
(A)
$
4
$
7
$
1,954
$
134
$
(2,548)
134
$
(179)
$
(165)
$
12
$
(125)
(659)
6
(778)
$ (644)
2
(55)
54
13
(2)
(778)
(4)
(3)
28
$
4
$
7
$
1,966
$
320
$
(2,421)
320
$
(957)
$
(137)
$
97
(830)
(733)
$ (413)
(733)
(6)
130
6
16
(3)
(38)
110
17
(29)
(6)
6
25
(20)
53
(3)
(915)
134
(125)
(659)
6
(4)
2
(55)
54
13
23
(6)
$
(1,532)
345
97
(830)
(6)
130
6
16
14
(29)
(38)
110
(20)
53
(3)
(in millions)
Balance as of October 31, 2007 . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss:
Foreign currency translation
adjustments . . . . . . . . . . . . . . . . . . . . .
Postretirement benefit adjustment . . . . . .
Other post-employment benefits . . . . . . .
Total other comprehensive loss . . . .
Total comprehensive loss . . . . . . . . . . . .
Tax effect of adoption of accounting for
uncertainty in income taxes . . . . . . . . .
Amounts due from officers and
directors . . . . . . . . . . . . . . . . . . . . . . . .
Stock options recorded as redeemable
equity securities . . . . . . . . . . . . . . . . . .
Transfer from redeemable equity
securities upon exercise or expiration
of stock options . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . .
Stock ownership programs . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of October 31, 2008 . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss:
Foreign currency translation
adjustments . . . . . . . . . . . . . . . . . . . . .
Postretirement benefit adjustment . . . . . .
Total other comprehensive loss . . . .
Total comprehensive loss . . . . . . . . . . . .
Stock options recorded as redeemable
equity securities . . . . . . . . . . . . . . . . . .
Redeemable equity securities
modification . . . . . . . . . . . . . . . . . . . . .
Transfer from redeemable equity
securities upon exercise or expiration
of stock options . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . .
Stock ownership programs . . . . . . . . . . .
Stock repurchases . . . . . . . . . . . . . . . . . .
Call options and warrants, net . . . . . . . . .
Equity component of convertible debt
instruments . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to non-controlling
interest . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest upon
consolidation of BDP and BDT . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of October 31, 2009 . . . . . . .
$
4
$
7
$
2,181
$
(2,101)
$
(1,690)
$
(149)
$
61
$
(1,687)
(A) Revised; See Note 1, Summary of significant accounting policies
70
Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Deficit (Continued)
Series D
Convertible
Junior
Preference
Stock
Common
Stock
Additional
Paid in
Capital
Compre-
hensive
Income
(Loss)
$223
Accumulated
Deficit
223
Accumulated
Other
Compre-
hensive
Loss
Common
Stock
Held in
Treasury,
at Cost
Stock-
holders
Equity
attributable
to Non-
controlling
interests
Total
44
267
22
472
494
$717
5
18
2
—
494
22
472
5
18
27
(57)
1
25
(57)
1
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income:
Foreign currency translation
adjustments . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefit adjustment . . . . . . . .
Total other comprehensive income . . .
Total comprehensive income . . . . . . . . . . .
Transfer from redeemable equity securities
upon exercise or expiration of stock
options . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . .
Stock ownership programs . . . . . . . . . . . . .
Cash dividends paid to non-controlling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of October 31, 2010 . . . . . . . .
$
4
$
7
$
2,206
$
(1,878)
$
(1,196)
$
(124)
$
49
$
(932)
See Notes to Consolidated Financial Statements
71
Navistar International Corporation
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies
Organization and Description of the Business
Navistar International Corporation (“NIC”), incorporated under the laws of the state of Delaware in 1993, is a
holding company whose principal operating subsidiaries are Navistar, Inc. and Navistar Financial Corporation
(“NFC”). References herein to the “Company,” “we,” “our,” or “us” refer collectively to NIC, its subsidiaries,
and certain variable interest entities (“VIEs”) of which we are the primary beneficiary. We operate in four
principal industry segments: Truck, Engine, Parts (collectively called “manufacturing operations”), and Financial
Services. The Financial Services segment consists of NFC and our foreign finance operations (collectively called
“financial services operations”). These segments are discussed in Note 18, Segment reporting.
Our fiscal year ends on October 31. All references to 2010, 2009, and 2008 relate to the fiscal year unless
otherwise indicated.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the assets, liabilities, and results of operations of
our manufacturing operations, majority-owned dealers, wholly-owned financial services subsidiaries, and VIEs
of which we are the primary beneficiary. The effects of transactions among consolidated entities have been
eliminated to arrive at the consolidated amounts. Certain reclassifications were made to prior years’ amounts to
conform to the 2010 presentation.
Variable Interest Entities
We are the primary beneficiary of several VIEs, primarily joint ventures, established to manufacture or distribute
products and enhance our operational capabilities. We are the primary beneficiary because our variable interests
absorb the majority of the VIE’s expected gains and losses. 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 the consolidated
entities. Assets of these entities are not available to satisfy claims against our general assets.
In January 2009, we reached a settlement agreement with Ford Motor Company (“Ford”) where we agreed to
settle our respective lawsuits against each other (the “Ford Settlement”). As a part of the Ford Settlement, on
June 1, 2009, our equity interest in our Blue Diamond Parts (“BDP”) and Blue Diamond Truck (“BDT”) joint
ventures with Ford were increased to 75%. With the increase in our equity interest, we determined that we were
the primary beneficiary of these two VIEs and have consolidated them since June 1, 2009. As a result, our
Consolidated Balance Sheets include assets of $312 million and $297 million and liabilities of $150 million and
$122 million as of October 31, 2010 and 2009, respectively, from BDP and BDT, including $16 million and $52
million of cash and cash equivalents, at the respective dates, which are not readily available to satisfy our other
obligations. The creditors of BDP and BDT do not have recourse to our general credit.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include
assets of $1.7 billion and $1.5 billion and liabilities of $1.6 billion and $1.2 billion as of October 31, 2010 and
2009, respectively, all of which are involved in securitizations that are treated as borrowings. In addition, our
Consolidated Balance Sheets include assets of $353 million and $782 million and related liabilities of $236
million and $634 million as of October 31, 2010 and 2009, respectively, all of which are involved in structures in
which we transferred assets in transactions that do not qualify for sale accounting treatment and are therefore
72
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
treated as borrowings. Investors that hold securitization debt have a priority claim on the cash flows generated by
their respective securitized assets to the extent they are entitled to pay principal and interest payments. Investors
in securitizations of these entities have no recourse to the general credit of NIC or any other consolidated entity.
Effective July 31, 2010, our Financial Services segment amended the master trust agreement with Navistar
Financial Dealer Note Master Trust (“Master Trust”). The amendment allows NFC, as transferor, an element of
control over the transferred receivables and control over eligibility of receivables available for transfer which
disqualified the Master Trust as a qualifying special purpose entity (“QSPE”) and therefore required the Master
Trust to be evaluated for consolidation as a VIE. As we are the primary beneficiary of the Master Trust, the
Master Trust’s assets of approximately $550 million, net of intercompany eliminations and retained interests
previously carried on our Consolidated Balance Sheet, and liabilities of approximately $550 million, net of
intercompany eliminations, were consolidated into the assets and liabilities of the Company effective with the
amendment. There was no impact on the Consolidated Statement of cash flows for the year ended October 31,
2010, as a result of the consolidation. As of October 31, 2010, the Master Trust had assets of approximately $638
million, net of intercompany eliminations, and liabilities of approximately $600 million. Prior to the amendment
to the master trust agreement, our Financial Services segment did not consolidate the Master Trust as it was a
QSPE that was outside the scope of the accounting guidance on consolidation of VIEs.
Previously, transfers of assets to the Master Trust were accounted for as sales when securitized and accordingly
those assets were not carried on our Consolidated Balance Sheets. We recognized an asset in Finance
Receivables, net representing our consolidated special purpose entities (“SPEs”) retained residual economic
interests in the future cash flows of the securitized assets.
Our Financial Services segment does not consolidate the Truck Retail Accounts Corporation’s (“TRAC”)
funding facility, a conduit, since we are not its primary beneficiary. TRAC, our consolidated SPE, obtains funds
from the conduit which securitizes the related assets. The transfers of the assets of TRAC are accounted for as
sales when securitized and accordingly those portions are not carried on our Consolidated Balance Sheets. TRAC
retains residual economic interests in the future cash flows of the securitized assets that are owned by the
conduit. We carry these retained interests as an asset, included in Finance receivables, net on our Consolidated
Balance Sheets. Retained interests are subordinated to the priority claims of investors in each respective
securitization; our maximum loss exposure to the activities of the off-balance sheet securitizations is limited to
our retained interests. See Note 6, Finance receivables, for further discussion.
We are also involved with other VIEs, which we do not consolidate because we are not the primary beneficiary.
Our determination that we are not the primary beneficiary of these entities is based upon the characteristics of our
variable interests, which do not absorb the majority of the VIE’s expected gains and losses. Our financial support
and maximum loss exposure relating to these non-consolidated VIEs is 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 (loss) income of non-consolidated affiliates includes our share of the net (loss)
income of these entities.
Revisions of Previously Issued Financial Statements
We have revised our previously reported Consolidated Balance Sheet as of October 31, 2009 and Consolidated
Statements of Stockholders’ Deficit for the years ended October 31, 2009 and 2008 to reflect the correction of
errors identified in those statements. The errors originated in periods prior to 2008 and the corrections are not
73
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
considered material to any previously reported consolidated financial statements. The 2009 and 2008 impact of
these errors, totaling $10 million, was recognized in our results for 2010 as they were not material to our
financial results. The revisions did not impact the Consolidated Statements of Cash Flows for those periods.
The errors related to the following: (i) an understatement of our net obligation for pension benefits of $25 million
due to our actuarially computed projected benefit obligations for pensions not measuring certain benefits, (ii) an
understatement of our asbestos claims reserve of $9 million for a mechanical error in the actuarial model used to
calculate our reserve, and (iii) an understatement of our reserve for certain disability programs for our Canadian
operations of $16 million due to an error in the application of accounting guidance for defined benefits and an
understatement of our deferred tax assets of $5 million related to this error.
We have adjusted our November 1, 2007 Accumulated deficit by $29 million and our Accumulated other
comprehensive loss by $24 million to recognize the correction of these errors in periods prior to 2008, increasing
our Accumulated stockholders’ deficit by $53 million.
As of November 1, 2009, we adopted new guidance on the accounting for convertible debt instruments that may
be settled in cash upon conversion (including partial cash settlement). As required, this new guidance was
adopted through retrospective application and our Consolidated Balance Sheet as of October 31, 2009 was
retroactively revised to reflect the increase to Additional paid in capital of $110 million, the reduction in Long-
term debt for the debt discount of $114 million, and the reduction in Other noncurrent assets for the equity
component of debt issuance costs of $4 million. As a result of the short period the debt was outstanding, adoption
of the new guidance did not have a material impact on our Consolidated Statement of Operations for the year
ended October 31, 2009. See Note 12, Debt, for further discussion.
As of November 1, 2009, we adopted new guidance on non-controlling interests that clarifies that non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity. As
required, this new guidance was adopted through retrospective application, and all prior period information has
been revised accordingly.
The following table sets forth the effects of the revisions on our Consolidated Balance Sheet as of October 31,
2009:
As Previously
Reported
Revisions for
New Accounting
Pronouncements
Revisions for
Accounting Errors
As Revised
(in millions)
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
Postretirement benefits liabilities . . . . . . . . . . . . . .
Other noncurrent liabilities . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interest
Additional paid in capital
. . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . .
Stockholders’ equity attributable to non-controlling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
$
5
$
(4)
(114)
—
—
(61)
110
—
—
61
—
—
25
25
—
—
(29)
(16)
—
57
103
4,156
2, 595
624
—
2,181
(2,101)
(1,690)
61
$
52
107
4,270
2,570
599
61
2,071
(2,072)
(1,674)
—
74
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The following table set forth the effects of the revisions on our consolidated stockholders’ deficit as of
October 31, 2009 and 2008:
(in millions)
Stockholders’ deficit, as previously reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1,813) $(1,495)
2009
2008
Cumulative effects of revisions
Accounting errors:
Adjustments to accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . .
New accounting pronouncements:
Adjustment to additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revision adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(29)
(16)
110
61
126
(29)
(14)
—
6
(37)
Stockholders’ deficit, as revised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1,687) $(1,532)
2009 Out-Of-Period Adjustments
Included in the results of operations for the year ended October 31, 2009 are certain out-of-period adjustments.
These adjustments represent corrections of prior-period errors primarily related to the following:
(i) overstatement of Accounts payable of $9 million due to processing errors in our Truck segment that originated
in the fourth quarter of 2008, (ii) overstatement in accruals of $10 million due to errors in self-insurance reserve
calculations and related intercompany transaction eliminations between our financial services operations and our
manufacturing operations that originated primarily in periods prior to 2008, and (iii) overstatement of our
warranty accrual in our Engine segment of $10 million as a result of non-warranty related costs being included in
the warranty accrual estimation process that originated primarily in periods prior to 2008. Correcting these errors,
which were not material to any of the related periods, resulted in a $29 million increase to Net income for the
year ended October 31, 2009.
Use of Estimates
The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting
principles (“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. Significant estimates and assumptions are used for, but are not
limited to, pension and other postretirement benefits, allowance for doubtful accounts, sales of receivables,
income tax contingency accruals and valuation allowances, product warranty accruals, asbestos and other product
liability accruals, asset impairment, and litigation-related accruals. Actual results could differ from our estimates.
Reversal of tax reserve for change in estimate
Under the Brazilian tax system, the state government levies a tax on the incremental value added to goods or
service (commonly known as “value added tax” or “VAT”). The VAT is computed based on the value added to
the taxed item which is then included in the price of products sold and purchased. We periodically review our
VAT credit balances for recoverability based primarily on projected sales and purchases. In the past, we
determined that a portion of our VAT credits were not recoverable and accordingly provided an allowance
against the balance not expected to be recovered. In conjunction with the review that occurred during the second
quarter of 2010, we reevaluated our VAT credit balance and reserve and concluded that based on actions taken to
facilitate changes in sales mix between domestic and export and production locations, it was probable that
previously reserved VAT credits will be utilized. As a result, we recognized a material pre-tax adjustment for this
change in estimate in Other income, net of $42 million, or $0.58 per diluted share.
75
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Concentration Risks
Our financial condition, results of operations, and cash flows are subject to concentration risks related to
concentrations of union employees and one customer. As of October 31, 2010, approximately 6,100, or 57%, of
our hourly workers and approximately 700 or 8%, of our salaried workers are represented by labor unions and are
covered by collective bargaining agreements. Our collective bargaining agreement with the National Automobile,
Aerospace and Agricultural Implement Workers of Canada (“CAW”), covering approximately 1,000 or 9% of
our hourly workers as of October 31, 2010, expired on June 30, 2009. As a result, we have temporarily ceased
production at our Chatham, Canada facility. Negotiations for a new collective bargaining agreement are ongoing.
See Note 18, Segment reporting, for discussion of customer concentration. Additionally, our future operations
may be affected by changes in governmental procurement policies, budget considerations, changing national
defense requirements, and global, political, and economic developments in the U.S. and certain foreign countries
(primarily Canada, Mexico, and Brazil).
Revenue Recognition
Our manufacturing operations recognize revenue when we meet four basic criteria: (i) persuasive evidence that a
customer arrangement exists, (ii) the price is fixed or determinable, (iii) collectibility is reasonably assured, and
(iv) delivery of product has occurred or services have been rendered. Sales are generally recognized when risk of
ownership passes.
Sales to fleet customers and governmental entities are recognized in accordance with the terms of each contract.
Revenue on certain customer requested bill and hold arrangements is not recognized until after the customer is
notified that the product (i) has been completed according to customer specifications, (ii) has passed our quality
control inspections, and (iii) is ready for delivery based upon the established delivery terms.
An allowance for sales returns is recorded as a reduction to revenue based upon estimates using historical
information about returns. For the sale of service parts that include a core component, we record revenue on a
gross basis including the fair market value of the core. A core component is the basic forging or casting, such as
an engine block, that can be remanufactured by a certified remanufacturing supplier. When a dealer returns a
core within the specified eligibility period, we provide a core return credit, which is applied to the customer’s
account balance. At times, we may mark up the core charge beyond the amount we are charged by the supplier.
This mark up is recorded as a liability, as it represents the amount that will be paid to the dealer upon return of
the core component and is in excess of the fair value to be received from the supplier.
Concurrent with our recognition of revenue, we recognize price allowances and the cost of incentive programs in
the normal course of business based on programs offered to dealers. Estimates are made for sales incentives on
certain vehicles in dealer stock inventory when special programs that provide specific incentives to dealers are
offered in order to facilitate sales to end customers.
Truck sales to the U.S. and foreign governments, of non-commercial products manufactured to government
specifications, are recognized using the units-of-delivery measure under the percentage-of-completion
accounting method as units are delivered and accepted by the government.
Modifications to U.S. and foreign government contracts, referred to as “change orders,” may be unpriced; that is,
the work to be performed is defined, but the resulting contract price adjustment is to be negotiated at a later date.
Revenue related to unpriced change orders is recognized when the price has been agreed with the government.
Costs related to unpriced change orders are deferred when it is probable that the costs will be recovered through a
contract price adjustment.
76
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Shipping and handling amounts billed to our customers are included in Sales of manufactured products, net and
the related shipping and handling costs incurred are included in Costs of products sold.
Financial services operations recognize revenue from retail notes, finance leases, wholesale notes, retail
accounts, and wholesale accounts as Finance revenues over the term of the receivables utilizing the effective
interest method. Certain direct origination costs and fees are deferred and recognized as adjustments to yield and
are reported as part of interest income over the life of the receivable. Loans are considered to be impaired when
we conclude there is a high likelihood the customer will not be able to make full payment after reviewing the
customer’s financial performance, payment ability, capital-raising potential, management style, economic
situation, etc. The accrual of interest on such loans is discontinued when the collection of the account becomes
doubtful (“non-accrual status loans”). Finance revenues on these loans are recognized only to the extent cash
payments are received. We resume accruing interest on these accounts when payments are current according to
the terms of the loans and future payments are reasonably assured.
Operating lease revenues are recognized on a straight-line basis over the life of the lease. Recognition of revenue
is suspended when management determines the collection of future revenue is not probable. Recognition of
revenue is resumed if collection again becomes probable.
Selected receivables are securitized and sold to public and private investors with limited recourse. Our financial
services operations continue to service the sold receivables and receive fees for such services. Gains or losses on
sales of receivables that qualify for sales accounting treatment are credited or charged to Finance revenues in the
period in which the sale occurs. Discount accretion is recognized on an effective yield basis and is included in
Finance revenues.
Cash and Cash Equivalents
All highly liquid financial instruments with maturities of 90 days or less from date of purchase, consisting
primarily of U.S. Treasury bills, federal agency securities, and commercial paper, are classified as cash
equivalents.
Restricted cash and cash equivalents are related to our securitized facilities, senior and subordinated floating rate
asset-backed notes, wholesale trust agreements, indentured trust agreements, letters of credit, Environmental
Protection Agency requirements, and workers compensation requirements. The restricted cash and cash
equivalents for our securitized facilities is restricted to pay interest expense, principal, or other amounts
associated with our securitization agreements.
Marketable Securities
Marketable securities consist of available-for-sale securities and are measured and reported at fair value. The
difference between amortized cost and fair value is recorded as a component of Accumulated other
comprehensive loss (“AOCL”) in Stockholders’ deficit, net of taxes. Most securities with remaining maturities of
less than twelve months and other investments needed for current cash requirements are classified as current in
our Consolidated Balance Sheets. Gains and losses on the sale of marketable securities are determined using the
specific identification method and are recorded in Other (income) expenses, net.
We evaluate our investments in marketable securities at the end of each reporting period to determine if a decline
in fair value is other than temporary. When a decline in fair value is determined to be other than temporary, an
impairment charge is recorded and a new cost basis in the investment is established. Our marketable securities
are classified as Level 1 in the fair value hierarchy.
77
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Derivative Instruments
We utilize derivative instruments to manage certain exposure to changes in foreign currency exchange rates,
interest rates, and commodity prices. The fair values of all derivative instruments are recognized as assets or
liabilities at the balance sheet date. Changes in the fair value of these derivative instruments are recognized in our
operating results or included in AOCL, depending on whether the derivative instrument is a fair value or cash
flow hedge and whether it qualifies for hedge accounting treatment. The Company elected to apply the normal
purchase and normal sale exclusion to certain commodity contracts that are entered into to be used in production
within a reasonable time during the normal course of business. For the years ended October 31, 2010, 2009, and
2008, all changes in the fair value of our derivatives were recognized in our operating results.
For derivative instruments qualifying as fair value hedges, changes in the fair value of the instruments are
included in Costs of products sold, Interest expense, or Other (income) expenses, net depending on the
underlying exposure. For derivative instruments qualifying as cash flow hedges, gains and losses are included in
AOCL, net of taxes, to the extent the hedges are effective. When the hedged items affect earnings, the effective
portions of the cash flow hedges are recognized as Costs of products sold, Interest expense, or Other (income)
expenses, net, depending on the underlying exposure. For derivative instruments used as hedges of our net
investment in foreign operations, gains and losses are included in AOCL, net of taxes, as part of the cumulative
translation adjustment to the extent the hedges are effective. The exchange of cash associated with hedging
derivative transactions is classified in the Consolidated Statements of Cash Flows in the same category as the
cash flows from the items being hedged. The ineffective portions of cash flow hedges and hedges of net
investments in foreign operations, if any, are recognized in Costs of products sold, Interest expense, and Other
(income) expenses, net. If the derivative instrument is terminated, we continue to defer the related gain or loss
and include it as a component of the cost of the underlying hedged item. Upon determination that the underlying
hedged item will not be part of a forecasted transaction, we recognize the related gain or loss in our operating
results.
Gains and losses on derivative instruments not qualifying for hedge accounting are recognized in Costs of
products sold, Interest expense, or Other (income) expenses, net depending on the underlying exposure. The
exchange of cash associated with these non-hedging derivative transactions is classified in the Consolidated
Statements of Cash Flows in the same category as the cash flows from the items subject to the economic hedging
relationships.
Trade and Finance Receivables
Trade Receivables
Trade accounts receivable and trade notes receivable primarily arise from sales of goods to independently owned
and operated dealers, original equipment manufacturers (“OEMs”), and commercial customers in the normal
course of business.
Finance Receivables
Finance receivables consist of the following:
Retail notes—Retail notes primarily consist of fixed rate loans to commercial customers to facilitate their
purchase of new and used trucks, trailers, and related equipment.
Finance leases—Finance leases consist of direct financing leases to commercial customers for acquisition
of new and used trucks, trailers, and related equipment.
78
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Wholesale notes—Wholesale notes primarily consist of variable rate loans to our dealers for the purchase of
new and used trucks, trailers, and related equipment.
Retail accounts—Retail accounts consist of short-term accounts receivable that finance the sale of products
to commercial customers.
Wholesale accounts—Wholesale accounts consist of short-term accounts receivable primarily related to the
sales of items other than trucks, trailers, and related equipment (e.g. service parts) to dealers.
Finance receivables are classified as held-to-maturity and are recorded at gross value less unearned income and
are reported net of allowances for doubtful accounts. Unearned revenue is amortized to revenue over the life of
the receivable using the effective interest method. Our financial services operations purchase the majority of the
wholesale notes receivable and some retail notes and accounts receivable arising from our manufacturing
operations. The financial services operations retain as collateral a security interest in the equipment associated
with retail notes, wholesale notes, and finance leases.
Sales of Finance Receivables
We sell finance receivables using a process commonly known as securitization, whereby asset-backed securities
are sold via public offering or private placement. These transactions are accounted for either as a sale with gain
or loss recorded at the date of sale and a retained interest recorded, or as secured borrowings. Most of our retail
note, finance lease and wholesale notes securitization arrangements do not qualify for sales accounting treatment.
As a result, the transferred receivables and the associated secured borrowings are included in our Consolidated
Balance Sheets and no gain or loss is recorded for these transactions. For those transfers that do qualify for sales
accounting treatment, gains or losses are included in Finance revenues.
Prior to an amendment to the Master Trust on July 31, 2010, our wholesale note securitization arrangements
qualified for sale accounting treatment whereby the notes receivable were removed from our Consolidated
Balance Sheets. Gains or losses from these sales were recognized in the period of sale based upon the relative fair
value of the portion sold and the portions allocated to the retained interests, and are included in Finance
revenues. Additionally, transfers of retail accounts made to a bank conduit funding facility currently qualify for
sale accounting treatment.
We may retain interests in the receivables sold (transferred). The retained interests in retail accounts may include
receivables used as over-collateralization (“excess sellers’ interests”) and cash reserves held for the benefit of the
trust. Prior to July 31, 2010, the retained interest also included excess sellers’ interest, cash reserves and interest
only strips relating to wholesale notes. We carry these retained interests as an asset, included in Finance
receivables, net on our Consolidated Balance Sheets. Our subordinated retained interests, including subordinated
securities, the right to receive excess spread (interest-only strip), and any residual interest in the trust, are the first
to absorb any credit losses on the transferred receivables. Our exposure to credit losses on the transferred
receivables is limited to our retained interests. Other than being required to repurchase receivables that fail to
satisfy certain representations and warranties provided at the time of the securitization, we are under no
obligation to repurchase any transferred receivable that becomes delinquent in payment or otherwise is in default.
The holders of the asset-backed securities have no recourse to us or our other assets for credit losses on
transferred receivables, and have no ability to require us to repurchase their securities. We do not guarantee any
securities issued by trusts.
We also act as servicer of transferred receivables in exchange for a fee. The servicing duties include collecting
payments on receivables and preparing monthly investor reports on the performance of the receivables that are
79
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
used by the trustee to distribute monthly interest and principal payments to investors. While servicing the
receivables, we apply the same servicing policies and procedures that are applied to our owned receivables. The
servicing income received by us is adequate to compensate us for our servicing responsibilities. Therefore, no
servicing asset or liability is recorded.
We determine the fair value of our retained interests by discounting the future expected cash flows. The future
expected cash flows are primarily affected by expected payment speeds and default rates. We estimate the
payment speeds for the receivables sold, the discount rate used to determine the present value of the excess
sellers’ interests and cash reserves, and the anticipated net losses on the receivables in order to calculate the gain
or loss on arrangements that qualify for sales treatment. Estimates are based on historical experience, anticipated
future portfolio performance, market-based discount rates, and other factors and are calculated separately for
each securitized transaction. In addition, we remeasure the fair values of the retained interests on a quarterly
basis and recognize changes in Finance revenues as required. The retained interests are classified as trading.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is established through a charge to Selling, general and administrative
expenses. The allowance is an estimate of the amount required to absorb probable losses on trade and finance
receivables that may become uncollectible. The receivables are charged off when amounts due are determined to
be uncollectible.
Troubled loan accounts are specifically identified and segregated from the remaining owned loan portfolio. The
expected loss on troubled accounts is fully reserved in a separate calculation as a specific reserve. A specific
reserve is recorded if it is determined that the account is impaired, and if the value of the underlying collateral is
less than the principal balance of the loan. In the U.S. we calculate a general reserve on the remaining loan
portfolio using loss ratios based on a pool method by asset type: retail notes and finance leases, retail accounts,
and wholesale accounts. Loss ratios are determined using historical loss experience in conjunction with current
portfolio trends in delinquencies and repossession frequency for each asset type. For finance receivables in
Mexico, we calculate a general reserve on the remaining portfolio in accordance with a parametric methodology
which assigns a rating to each customer based on payment behavior. Each rating establishes a percentage based
on probability of default and collateral value. This percentage is applied to the unpaid balance to determine the
amount of the general reserve. Mexican customer balances over $5 million are evaluated individually using
qualitative and quantitative information listed below.
When we evaluate the adequacy of the loss allowance for finance receivables, several risk factors are considered
for each type of receivable. For retail notes, wholesale notes, finance leases, and retail accounts, the primary risk
factors are the general economy, fuel prices, type of freight being hauled, length of freight movements, number
of competitors our customers have in their service territory, how extensively our customers use independent
operators, profitability of owner operators, and expected value of the underlying collateral.
To establish a specific reserve in the loss allowance for receivables, we look at many of the same factors listed
above but also consider the financial strength of the customer or dealer and key management, the timeliness of
payments, the number and location of satellite locations (especially for the dealer), the number of dealers of
competitor manufacturers in the market area, type of equipment normally financed, and the seasonality of the
business.
80
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Repossessions
Gains or losses arising from the sale of repossessed collateral supporting finance receivables and operating leases
are recognized in Selling, general and administrative expenses. Repossessed assets are recorded within
Inventories at the lower of historical cost or fair value, less estimated costs to sell.
Inventories
Inventories are valued at the lower of cost or market. Cost is principally determined using the first-in, first-out
(“FIFO”) and average cost methods.
Property and Equipment
We report land, buildings, leasehold improvements, machinery and equipment (including tooling and pattern
equipment), furniture, fixtures, and equipment, and equipment leased to others at cost, net of depreciation. We
report assets under capital lease obligations at the lower of their fair value or the present value of the aggregate
future minimum lease payments as of the beginning of the lease term. We depreciate our assets using the
straight-line method over the shorter of the lease term or the estimated useful lives of the assets. The ranges of
estimated useful lives are as follows:
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures, and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years
20 – 50
3 – 20
3 – 12
3 – 15
1 – 10
Long-lived assets are evaluated periodically to determine if adjustment to the depreciation and amortization
period or to the unamortized balance is warranted. Such evaluation is based principally on the expected
utilization of the long-lived assets.
We depreciate trucks, tractors, and trailers leased to customers under operating lease agreements on a straight-
line basis to the equipment’s estimated residual value over the lease term. The residual values of the equipment
represent estimates of the value of the assets at the end of the lease contracts and are initially recorded based on
estimates of future market values. Realization of the residual values is dependent on our future ability to market
the equipment. We review residual values periodically to determine that recorded amounts are appropriate and
the equipment has not been impaired.
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and
improvements that increase the estimated useful life or productive capacity of an asset and we capitalize interest
on major construction and development projects while in progress.
Gains or losses on disposition of property and equipment are recognized in Other (income) expenses, net.
We test for impairment of long-lived assets whenever events or changes in circumstances indicate that the
carrying value of an asset or asset group (hereinafter referred to as “asset group”) may not be recoverable by
comparing the sum of the estimated undiscounted future cash flows expected to result from the operation of the
asset group and its eventual disposition to the carrying value. If the sum of the undiscounted future cash flows is
less than the carrying value, the fair value of the asset group is determined. The amount of impairment is
calculated by subtracting the fair value of the asset group from the carrying value of the asset group.
81
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Goodwill and Other Intangible Assets
We evaluate goodwill and other intangible assets not subject to amortization for impairment annually at
October 31 or more frequently whenever indicators of potential impairment exist. A significant amount of
judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include,
among others, (i) a significant decline in expected future cash flows, (ii) a sustained, significant decline in equity
price and market capitalization, (iii) a significant adverse change in legal factors or in the business climate,
(iv) unanticipated competition, and (v) slower growth rates. Goodwill is considered impaired when the fair value
of a reporting unit is determined to be less than the carrying value including goodwill. The amount of impairment
loss is determined based on a comparison of the implied fair value of the reporting unit’s goodwill to the actual
carrying value. Intangible assets not subject to amortization are considered impaired when the intangible asset’s
fair value is determined to be less than the carrying value.
We use the present value of estimated future cash flows to establish the estimated fair value of our reporting units
as of the testing date. This approach includes many assumptions related to future growth rates, discount rates,
market comparables, control premiums and tax rates, among other considerations. Changes in economic and
operating conditions impacting these assumptions could result in an impairment of goodwill in future periods.
When available and as appropriate, we use comparative market multiples to corroborate the estimated fair value.
Intangible assets subject to amortization are also evaluated for impairment periodically or when indicators of
impairment are determined to exist. We test for impairment of intangible assets subject to amortization by
comparing the sum of the estimated undiscounted future cash flows expected to result from the use of the asset to
the carrying value. If the sum of the estimated undiscounted future cash flows is less than the carrying value, the
fair value of the asset group is determined. The amount of impairment, if any, is calculated by subtracting the fair
value of the asset from the carrying value of the asset. Our impairment loss calculations require us to apply
judgments in estimating future cash flows and asset fair values. This judgment includes developing cash flow
projections and assessing probability weightings to certain business scenarios. Other assets could become
impaired in the future or require additional charges as a result of declines in profitability due to changes in
volume, market pricing, cost, manner in which an asset is used, physical condition of an asset, laws and
regulations, or in the business environment. Significant adverse changes to our business environment and future
cash flows could cause us to record additional impairment charges in future periods, which could be material. We
amortize the cost of intangible assets over their respective estimated useful lives generally on a straight-line
basis. The ranges for the amortization periods are generally as follows:
Customer base and relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years
3 – 15
20
3
3 – 17
Investments in and Advances to Non-consolidated Affiliates
Equity method investments are recorded at original cost and adjusted periodically to recognize (i) our
proportionate share of the investees’ net income or losses after the date of investment, (ii) additional
contributions made and dividends or distributions received, and (iii) impairment losses resulting from
adjustments to net realizable value.
We assess the potential impairment of our equity method investments and determine fair value based on
valuation methodologies, as appropriate, including the present value of estimated future cash flows, estimates of
82
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
sales proceeds, and external appraisals. If an investment is determined to be impaired and the decline in value is
other than temporary, we record an appropriate write-down.
Debt Issuance Costs
We amortize debt issuance costs and premiums over the remaining life of the related debt using the effective
interest method. The related income or expense is included in Interest expense. We record discounts or premiums
as a direct deduction from, or addition to, the face amount of the debt.
Pensions and Postretirement Benefits
We use actuarial methods and assumptions to account for our pension plans and other postretirement benefit
plans. Pension and other postretirement benefits expense includes the actuarially computed cost of benefits
earned during the current service period, the interest cost on accrued obligations, the expected return on plan
assets based on fair market values, the straight-line amortization of net actuarial gains and losses and plan
amendments, and adjustments due to settlements and curtailments.
Engineering and Product Development Costs
Engineering and product development costs arise from ongoing costs associated with improving existing
products and manufacturing processes and for the introduction of new truck and engine components and
products, and are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and are included in Selling, general and administrative expenses.
These costs totaled $27 million, $15 million, and $24 million for the years ended October 31, 2010, 2009, and
2008, respectively.
Contingency Accruals
We accrue for loss contingencies associated with outstanding litigation for which we have determined it is
probable that a loss has occurred and the amount of loss can be reasonably estimated. Our asbestos, product
liability, environmental, and workers compensation accruals also include estimated future legal fees associated
with the loss contingency, as we believe we can reasonably estimate those costs. In all other instances, legal fees
are expensed as incurred. These expenses may be recorded in Costs of products sold, Selling, general and
administrative expenses, or Other (income) expenses, net. These estimates are based on our expectations of the
scope, length to complete, and complexity of the claims. In the future, additional adjustments may be recorded as
the scope, length, or complexity of outstanding litigation changes.
Warranty
We generally offer one to five-year warranty coverage for our truck and engine products and our service parts.
Terms and conditions vary by product, customer, and country. Optional extended warranty contracts can be
purchased for periods ranging from one to ten years. We accrue warranty related costs under standard warranty
terms and for claims that we choose to pay as an accommodation to our customers even though we are not
contractually obligated to do so. Warranty revenues related to extended warranty contracts are amortized to
income, over the life of the contract, using the straight-line method. Costs under extended warranty contracts are
83
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
expensed as incurred. We base our warranty accruals on estimates of the expected warranty costs that incorporate
historical information and forward assumptions about the nature, frequency, and average cost of warranty claims.
Initial warranty estimates for new model year products are based on the previous model year product’s warranty
experience until the product progresses through its life cycle and related claims data becomes more mature. For
initial warranty estimates related to new launch year products, we also consider historic experience from previous
launches. When collection is reasonably assured, we also estimate the amount of warranty claim recoveries to be
received from our suppliers and record them in Other current assets and Other noncurrent assets. Recoveries
related to specific product recalls, in which a supplier confirms its liability under the recall, are recorded in Trade
and other receivables, net. Warranty costs are included in Costs of products sold.
Accrued product warranty and deferred warranty revenue activity is as follows:
(in millions)
Balance, at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs accrued and revenues deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to pre-existing warranties(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments and revenues recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty adjustment related to legal settlement(B) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Balance, at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent accrued product warranty and deferred warranty revenue . . . . . . . .
$
2010
2009
2008
492
269
51
(306)
—
506
252
254
$
$
602
217
114
(366)
(75)
492
246
246
$
$
$
677
206
76
(357)
—
602
262
340
(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. In the second quarter of 2009, we
recorded material adjustments for changes in estimates of $61 million, or $0.86 per diluted share, while in the fourth quarter of 2008, we
recorded adjustments of $66 million, or $0.90 per diluted share.
(B) See Note 2, Ford settlement and related charges, for discussion regarding warranty adjustments related to the Ford Settlement.
The amount of deferred revenue related to extended warranty programs at October 31, 2010, 2009, and 2008 was
$167 million, $139 million, and $129 million, respectively. Revenue recognized under our extended warranty
programs in 2010, 2009, and 2008 was $46 million, $41 million, and $47 million, respectively.
Stock-based Compensation
We have various plans that provide for the granting of stock-based compensation to certain employees, directors,
and consultants, which are described more fully in Note 21, Stock-based compensation plans. Shares are issued
upon option exercise from Common stock held in treasury.
For transactions in which we obtain employee services in exchange for an award of equity instruments, we
measure the cost of the services based on the grant date fair value of the award. We recognize the cost over the
period during which an employee is required to provide services in exchange for the award, known as the
requisite service period (usually the vesting period). Costs related to plans with graded vesting are generally
recognized using a straight-line method. Cash flows resulting from tax benefits for deductions in excess of
compensation cost recognized are included in financing cash flows.
84
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Foreign Currency Translation
We translate the financial statements of foreign subsidiaries, whose local currency is their functional currency, to
U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for
each period for revenues and expenses. Differences arising from exchange rate changes are included in the
Foreign currency translation adjustments component of AOCL.
For foreign subsidiaries whose functional currency is the U.S. dollar, we remeasure non-monetary balance sheet
accounts and the related income statement accounts at historical exchange rates. Resulting gains and losses
arising from the fluctuations in currency for monetary accounts are recognized in Other (income) expenses, net.
Gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies
other than the functional currency are recognized in earnings as incurred. We recognized net foreign currency
transaction gains of $7 million and $36 million in 2010 and 2009, respectively and foreign currency transaction
losses of $19 million in 2008, which were recorded in Other (income) expenses, net.
Income Taxes
We file a consolidated U.S. federal income tax return for NIC and its eligible domestic subsidiaries. Our
non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes
under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and tax benefit carry forwards. Deferred tax assets and
liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established
or maintained when, based on currently available information and other factors, it is more likely than not that all
or a portion of a deferred tax asset will not be realized.
Accounting standards on accounting for uncertainty in income taxes address the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under
the guidance on accounting for uncertainty in income taxes, we may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also
provides guidance on de-recognition, classification, interest and penalties on income taxes, and accounting in
interim periods.
Earnings Per Share
The calculation of basic earnings per share is based on the weighted-average number of our common shares
outstanding during the applicable period. The calculation for diluted earnings per share recognizes the effect of
all potential dilutive common shares that were outstanding during the respective periods, unless their impact
would be anti-dilutive.
Diluted earnings per share recognizes the dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into shares. For us, these potential shares arise from common stock
options, convertible debt, and call options.
We use the treasury stock method to calculate the dilutive effect of our stock options, convertible debt, and call
options (using the average market price). Shares potentially issuable for certain stock options, our convertible
85
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
debt and our call options were not included in the computation of diluted earnings per share for the periods
presented because inclusion would be anti-dilutive. In addition, shares potentially issuable for our warrant
transactions were not included as they are by design anti-dilutive. For periods in which there was a net loss to
common stockholders, no potentially dilutive securities are included in the calculation of diluted loss per share,
as inclusion of these securities would have reduced the net loss per share.
Recently Adopted Accounting Standards
As of October 31, 2010, we adopted new guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan. This guidance requires enhanced transparency surrounding the types
of plan assets and associated risks, as well as disclosure of information about fair value measurements of plan
assets. The disclosures required by this guidance are included in Note 13, Postretirement benefits.
As of April 30, 2010, we adopted new guidance regarding disclosures about fair value measurements. The
guidance requires new disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements.
The guidance also provides clarification to existing disclosures. The disclosures required by this guidance are
included in Note 9, Fair value measurements.
As of February 1, 2010, we adopted new guidance regarding revenue arrangements with multiple deliverables.
This guidance requires companies to allocate revenue in arrangements involving multiple deliverables based on
the estimated selling price of each deliverable, even though such deliverables are not sold separately either by the
company or by other vendors. The Company elected to early adopt this guidance at the beginning of our second
quarter of fiscal 2010 on a prospective basis. As required by the guidance, as the period of adoption was not the
beginning of our fiscal year, we applied the adoption retrospectively from November 1, 2009. There was no
impact on our Consolidated Statement of Operations related to the adoption of this guidance.
As of November 1, 2009, we adopted new guidance on the accounting for convertible debt instruments that may
be settled in cash upon conversion (including partial cash settlement), which requires issuers of convertible debt
securities within its scope to separate these securities into a debt component and an equity component, resulting
in the debt component being recorded at estimated fair value without consideration given to the conversion
feature. Issuance costs are also allocated between the debt and equity components. The guidance requires that
convertible debt within its scope reflect a company’s nonconvertible debt borrowing rate when interest expense
is recognized. The provisions of the guidance were retrospective upon adoption. See Note 12, Debt, for further
discussion.
As of November 1, 2009, we adopted new guidance on non-controlling interests that clarifies that non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity. As
required, this guidance was adopted through retrospective application, and all prior period information has been
revised accordingly.
As of November 1, 2009, we adopted new guidance on the determination of the useful life of intangible assets.
This guidance amends the factors that should be considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset. The guidance also requires expanded disclosure
related to the determination of useful lives for intangible assets and should be applied to all intangible assets
recognized as of, and subsequent to, the effective date. The adoption did not have a material impact on our
consolidated financial statements.
As of November 1, 2009, we adopted new guidance on fair value measurements for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in our consolidated financial statements on a
nonrecurring basis. The adoption did not have a material impact on our consolidated financial statements.
86
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
As of November 1, 2009, we adopted new guidance that substantially changes the accounting for and reporting of
business combinations including (i) expanding the definition of a business and a business combination,
(ii) requiring all assets and liabilities of the acquired business, including goodwill and contingent consideration to
be recorded at fair value on the acquisition date, (iii) requiring acquisition-related transaction and restructuring
costs to be expensed rather than accounted for as acquisition costs, and (iv) requiring reversals of valuation
allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties to be
recognized in earnings. The adoption did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
Accounting guidance issued by various standard setting and governmental authorities that have not yet become
effective with respect to our consolidated financial statements are described below, together with our assessment
of the potential impact they may have on our consolidated financial statements:
In July 2010, the Financial Accounting Standards Board (“FASB”) issued new guidance regarding disclosures
about the credit quality of financing receivables and the allowance for credit losses. The guidance will require
disaggregated information about the credit quality of financing receivables and the allowance for credit losses
based on portfolio segment and class, as well as disclosure of credit quality indicators, past due information, and
modifications of financing receivables. The disclosures as of the end of a reporting period are effective for
interim and annual reporting periods ending on or after December 15, 2010. Our effective date is the period
ending January 31, 2011. The disclosures about activity that occurs during a reporting period are effective for
interim and annual reporting periods beginning on or after December 15, 2010. Our effective date is the period
beginning February 1, 2011. When effective, we will comply with the disclosure provisions of this guidance.
In January 2010, the FASB issued new guidance regarding disclosures about fair value measurements. The
guidance requires new disclosures related to activity in Level 3 fair value measurements. This guidance requires
purchases, sales, issuances, and settlements to be presented separately in the rollforward of activity in Level 3
fair value measurements and is effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Our effective date is November 1, 2011. When effective, we will comply with
the disclosure provisions of this guidance.
In June 2009, the FASB issued new guidance on accounting for transfers of financial assets. The guidance
eliminates the concept of a QSPE, changes the requirements for derecognizing financial assets, and requires
additional disclosures in order to enhance information reported to users of financial statements by providing
greater transparency about transfers of financial assets, including securitization transactions, and an entity’s
continuing involvement in and exposure to the risks related to transferred financial assets. This guidance is
effective for fiscal years beginning after November 15, 2009. Our effective date is November 1, 2010. Upon
adoption, future transfers of finance receivables from our financial services segment to the TRAC funding
conduit will no longer receive sale accounting treatment. The adoption is not expected to have a material impact
on our consolidated financial statements.
In June 2009, the FASB issued new guidance regarding the consolidation of VIEs. The guidance also amends the
determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to
consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative
analysis will include, among other things, consideration of who has the power to direct the activities of the entity
that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or
the right to receive benefits of the VIE that could potentially be significant to the VIE. This guidance also
requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Prior guidance
87
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events
had occurred. QSPEs, which were previously exempt from the application of this guidance, will be subject to the
provisions of this guidance when it becomes effective. The guidance also requires enhanced disclosures about an
enterprise’s involvement with a VIE. This guidance is effective for the first annual reporting period beginning
after November 15, 2009 and for interim periods within that first annual reporting period. Our effective date is
November 1, 2010. We do not expect the adoption of this guidance will have a material impact on our
consolidated financial statements.
2. Ford settlement and related charges
In 2008, the Engine segment recognized $395 million of charges for impairments of property and equipment and
other costs associated with its asset groups in the VEE Business Unit. The impairment charges were the result of
a reduction in demand from Ford for diesel engines produced by the VEE Business Unit and the expectation that
Ford’s demand for diesel engines would continue to be below previously anticipated levels.
In the first quarter of 2009, we reached a settlement agreement with Ford where we agreed to settle our
respective lawsuits against each other. The result of the Ford Settlement resolves all prior warranty claims,
resolves the selling price for our engines going forward, and allows Ford to pursue a separate strategy related to
diesel engines in its products. Additionally, both companies agreed to end their current North America supply
agreement for diesel engines as of December 31, 2009 (the agreement was otherwise set to expire July 2012). In
the first quarter of 2009, we received a $200 million cash payment from Ford, which was recorded as a gain in
Other (income) expenses, net, and we reversed our previously recorded warranty liability of $75 million, which
was recorded as a reduction of Costs of products sold. In the third quarter of 2009, we increased our interest in
our BDP and BDT joint ventures with Ford to 75%. We recognized a gain of $23 million in Other income, net in
connection with the increased equity interests in BDP. The increased equity interest in BDT did not result in a
gain or loss. For additional information on the consolidations of BDP and BDT, see Note 4, Acquisitions and
disposals of businesses. For additional information on the Ford Settlement, see Note 17, Commitments and
contingencies.
Also in the first quarter of 2009, with the changes in Ford’s strategy, we announced our intention to close our
Indianapolis Engine Plant (“IEP”) and our Indianapolis Casting Corporation foundry (“ICC”) and the Engine
segment recognized $58 million of restructuring charges. The restructuring charges consisted of $21 million in
personnel costs for employee termination and related benefits, $16 million of charges for pension and other
postretirement contractual termination benefits and a pension curtailment, and $21 million of other contractual
costs. In the fourth quarter of 2009, the Engine segment recognized an additional $4 million of charges for
benefits to terminated employees. Net of first quarter adjustments of $3 million reducing personnel costs for
employee termination, the Engine segment recognized $59 million of restructuring charges for the year ended
October 31, 2009. In the third quarter of 2009, we made the decision that at IEP we will continue certain quality
control and manufacturing engineering activities and there will be no other business activities aside from these
after July 31, 2009. We had previously delayed the closure of ICC due to supply and other customer needs. In
July 2010, we reached agreement with ICC employees represented by the United Automobile, Aerospace and
Agricultural Implement Workers of America (“UAW”) and will now continue operations at ICC. As a result, we
have reversed our remaining restructuring reserve of $6 million and $4 million of charges for pension and other
postretirement contractual termination benefits associated with the previously planned action at ICC.
In the first quarter of 2010, we settled a portion of our other contractual costs and recognized a $16 million
benefit in Restructuring charges.
88
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The following table summarizes the 2009 and 2010 activity in the restructuring liability related to Ford, which
excludes pension and other postretirement contractual termination benefits charges, and the pension curtailment:
Balance at
October 31,
2008
Additions Payments Adjustments
Balance at
October 31,
2009
Additions Payments Adjustments
Balance at
October 31,
2010
(in millions)
Employee termination
charges . . . . . . . . . . .
$ —
$
25
$
(2)
$
(3)
$
20
$ — $
(12)
$
(8)
$ —
Other contractual
costs . . . . . . . . . . . . .
—
21
—
—
21
—
(5)
(16)
—
Restructuring
liability . . . . . . .
$ —
$
46
$
(2)
$
(3)
$
41
$ — $
(17)
$
(24)
$ —
In addition to the restructuring charges, in 2009 the Engine segment recognized other related charges for
inventory valuation and low volume adjustments of $105 million of which $81 million and $24 million were
recognized in Costs of products sold and Other (income) expenses, net, respectively. Offsetting the charges were
warranty recoveries of $29 million, of which $26 million and $3 million were recognized in Other (income)
expenses, net and Costs of products sold, respectively. Included in these charges and offsetting recoveries was the
impact of our settlement with Continental Automotive Systems US, Inc. (“Continental”).
In the fourth quarter of 2009, we agreed to settle our commercial dispute related to Continental’s low volume
damages claim and our counter claim related to quality issues for products primarily sold to Ford. Through this
settlement, our ongoing business relationships were restructured and all existing claims between the Company
and Continental were settled. The settlement agreement with Continental was a multiple element arrangement
which, among other things, included an agreement for the Company to acquire all membership interests, certain
assets, and assume certain liabilities of Continental Diesel Systems US, LLC (“CDS”), a wholly owned
subsidiary of Continental. In addition to a cash payment of $18 million to Continental, we determined the fair
value of consideration exchanged included $29 million of warranty recoveries offset by $27 million of low
volume adjustments. Net of the reversal of existing balances, we recognized a net charge of $2 million related to
the settlement. For additional information on the acquisition of CDS, see Note 4, Acquisitions and disposals of
businesses. For additional information on the settlement with Continental, see Note 17, Commitments and
contingencies.
3. Restructuring
The Company recognized $15 million of benefits related to restructuring activity in 2010 and $59 million of
restructuring charges in 2009. The restructuring charges recorded are 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 charges in 2009 related to restructuring activity at ICC and IEP. In 2010, we recognized a $16
million benefit when we settled a portion of contractual costs included in our restructuring accrual and $10
million benefit when we reversed our remaining restructuring reserve of $6 million and $4 million of charges for
pension and other postretirement contractual termination benefits associated with the previously planned action
at ICC. For additional information on the Ford related restructuring activities, see Note 2, Ford settlement and
related charges.
On October 30, 2010, our UAW represented employees ratified a new four-year labor agreement that replaced
the prior contract that expired October 1, 2010. The Company’s contract with the UAW covers four separate
89
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
multi-site bargaining units. The contract included, among other things, ratification bonuses, lump-sum payments,
retention bonuses, and early and voluntary retirement benefits. The contract allows the Company additional
flexibility in manufacturing decisions and includes provisions for the wind-down of UAW positions at our Fort
Wayne facility. As a result of the contract ratification and planned wind-down of UAW positions at our Fort
Wayne facility, the Truck segment recognized $9 million of restructuring charges. The restructuring charges
consisted of $5 million in personnel costs for employee termination and related benefits and $4 million of
charges for pension and other postretirement contractual termination benefits. We expect the restructuring
charges, excluding pension and other postretirement related costs, will be paid over the next two to three years.
As discussed in Note 12, Debt, we will utilize proceeds from the October 2010 tax-exempt bond financing to
finance the relocation of the Company’s headquarters, the expansion of an existing warehouse facility, and the
development of certain industrial facilities. We continue to develop plans for efficient transitions related to these
activities and evaluate other options to continue the optimization of our operations and management structure.
We expect to incur additional future restructuring charges as plans are developed.
4. Acquisitions and disposals of businesses
Blue Diamond Parts
BDP was formed in August 2001 as a joint venture between Ford and Navistar (collectively, the “Members”),
with Ford owning 51% and Navistar owning 49%. BDP manages the sourcing, merchandising, and distribution
of various spare parts for vehicles the Members sell in North America. These spare parts are primarily for
Navistar diesel engines in Ford trucks, commercial truck parts, and certain parts for F650/750 and Low-Cab
Forward trucks produced for Ford by BDT. Substantially all of BDP’s transactions are between BDP and its
Members.
In June 2009, pursuant to the provisions of the Ford Settlement, we increased our equity interest in BDP from
49% to 75%, effective June 1, 2009. Our voting interest in BDP remains 50%. The receipt of additional equity
interest from Ford was among the various components of the Ford Settlement, and no additional consideration
was paid to Ford in connection with the increase in equity interest in BDP. We determined the fair value of the
increased interest in BDP based on a discounted cash flow model utilizing BDP’s estimated future cash flows.
The fair value of the increased interest, net of settlement of an executory contract, was $23 million and we
recognized a gain of this amount in Other (income) expenses, net in our Engine segment in the third quarter of
2009.
With the increase in our equity interest, we determined that we are now the primary beneficiary of BDP and have
consolidated the operating results of BDP since June 1, 2009. As a result of the BDP acquisition, we recognized
an intangible asset for customer relationships of $45 million and have assigned a useful life of nine years. For
additional information on the Ford Settlement, see Note 2, Ford settlement and related charges.
90
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The unaudited pro forma financial information in the table below summarizes the combined results of operations
of Navistar and BDP as though BDP had been combined as of the beginning of the periods presented. The
unaudited pro forma financial information is presented for informational purposes only and is not indicative of
the results of operations that would have been achieved if the acquisition had taken place at the beginning of the
periods, or that may result in the future.
2009(A)
2008(B)
(in millions, except per share data)
Sales and revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . .
(Unaudited)
11,702
$
295
343
25
(Unaudited)
14,957
$
171
213
42
Net income attributable to Navistar International Corporation . . . . . . . . . . . . . . . . . . . .
$
318
$
171
Pro forma basic earnings per share attributable to Navistar International Corporation:
Income attributable to Navistar International Corporation before extraordinary
gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Navistar International Corporation . . . . . . . . . . . . . . . .
Pro forma diluted earnings per share attributable to Navistar International Corporation:
Income attributable to Navistar International Corporation before extraordinary
gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Navistar International Corporation . . . . . . . . . . . . . . . .
$
$
$
$
4.15
0.33
4.48
4.11
0.32
4.43
$
$
$
$
2.42
—
2.42
2.34
—
2.34
(A) Effective June 1, 2009, BDP changed its fiscal year from December 31 to October 31. Also effective June 1, 2009, BDP is accounted for
as a consolidated subsidiary. The unaudited pro forma financial information for the year ended October 31, 2009, as presented above,
reflects the change in fiscal year and is based on the historical unaudited Consolidated Statement of Operations of BDP for the seven
months ended May 31, 2009 (through the date of acquisition) and results of operations of BDP from June 1, 2009 through October 31,
2009 as included in the our Consolidated Statement of Operations.
(B) The unaudited pro forma financial information for the year ended October 31, 2008 is based on the historical audited Consolidated
Statements of Operations of BDP for the year ended December 31, 2008. As such, the months of November and December 2008 are
included in both the unaudited pro forma financial information for the years ended October 31, 2009 and 2008. For the period of overlap,
sales of manufactured products, net and net income of BDP were $38 million and $33 million, respectively.
Monaco Coach Corporation
In June 2009, we acquired certain assets of Monaco Coach Corporation, a former recreational vehicle
manufacturer, for cash consideration of approximately $50 million including transaction costs and the payment
of certain tax liabilities of $5 million. The acquisition fits our strategy of leveraging our assets to expand our
diesel business, serving the end customer, and complements our Workhorse Custom Chassis (“WCC”) business.
The fair value assigned to the net assets acquired exceeded the purchase price and was allocated as a pro rata
reduction of the amounts that would have otherwise been assigned to noncurrent assets that are not held-for-sale,
including property and equipment and other intangible assets. The excess that remained after reducing to zero the
amounts that otherwise would have been assigned to noncurrent assets was $23 million and was recognized in
Extraordinary gain, net of tax in our Truck segment. The fair values of the assets and liabilities as of the
acquisition date after the pro rata allocations were $73 million of Inventories, $1 million of Other noncurrent
assets, and $1 million of Other current liabilities. The results of operations for Monaco have been included in the
Consolidated Statements of Operations since its acquisition in our Truck segment.
91
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Blue Diamond Truck
BDT was formed in September 2001 as a joint venture between us and Ford to manufacture and develop certain
medium and light commercial trucks for sale to us and Ford. Historically, BDT has not resulted in material
amounts of Equity in income of non-consolidated affiliates. In June 2009, pursuant to the provisions of the Ford
Settlement, we increased our equity interest in BDT from 51% to 75%, effective June 1, 2009. Our voting
interest in BDT remains 50%. The receipt of additional equity interest from Ford was among the various
components of the Ford Settlement, and no additional consideration was paid to Ford in connection with the
increase in equity interest in BDT.
We determined the fair value of the increased interest in BDT based on a discounted cash flow model utilizing
BDT’s estimated future cash flows. No gain or loss was recognized in connection with the increased equity
interest in BDT. The settlement of executory contracts did not impact the transaction as they approximated fair
value. With the increase in our equity interest, we determined that we are now the primary beneficiary of BDT
and have consolidated the operating results of BDT since June 1, 2009 in our Truck segment. As we are
consolidating BDT as a result of being the primary beneficiary of the VIE, we recorded the initial consolidation
based on 100% of the fair values of BDT’s assets and liabilities. For additional information on the Ford
Settlement, see Note 2, Ford settlement and related charges.
Continental Diesel Systems US, LLC
In October 2009, we acquired all of the membership interests and certain assets and assumed certain liabilities
associated with CDS’s Amplified Common Rail injector business, for total consideration of approximately $20
million consisting of $18 million of cash and $2 million of net consideration related to the settlement of prior
disputes between the Company and Continental. CDS is a leading manufacturer of injectors used in fuel systems
that are installed into various diesel engines. The acquired company, renamed Pure Power Technologies, LLC,
will allow us to further vertically integrate research and development, engineering and manufacturing capabilities
to produce world-class diesel power systems and advanced emissions control systems.
The fair value assigned to the net assets acquired exceeded the purchase price and was allocated as a pro rata
reduction of the amounts that would have otherwise been assigned to noncurrent assets including property and
equipment and other intangible assets. As the acquisition closed on October 31, 2009, the assets and liabilities of
CDS were consolidated into our Consolidated Balance Sheet effective October 31, 2009, while the results of
operations were consolidated into our Consolidated Statements of Operations beginning November 1, 2009 in our
Engine segment. For additional information on the settlement of prior disputes between the Company and
Continental, see Note 2, Ford settlement and related charges.
Workhorse Custom Chassis Escrow
As part of our 2005 acquisition of WCC, $25 million of the purchase price was set aside in an escrow account to
be used to indemnify us for certain contingencies assumed upon acquisition. As of October 31, 2009, $16 million
remained in escrow and we have asserted claims in excess of that amount for reimbursement from the seller. In
2009, we received $9 million from the escrow account as resolution to our asserted claims. The purchase price
was reduced by $7 million and was recorded as a reduction to goodwill and we recognized $2 million in Costs of
products sold.
Dealer operations
We acquire and dispose of dealerships from time to time to facilitate the transition of dealerships from one
independent owner to another. These dealerships are included in our consolidated financial statements from their
respective dates of acquisition in our Truck segment. We did not acquire any dealerships in 2010, 2009, or 2008.
92
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
We sold three, four, and two of our Dealcors during the years ended October 31, 2010, 2009, and 2008,
respectively. The gains or losses associated with the sales of these Dealcors were not material.
Other
During 2008, we sold all of our interests in a heavy-duty truck parts remanufacturing business. In connection
with the sale, we received gross proceeds of $22 million, including liabilities assumed, resulting in a gain of $4
million.
5. Allowance for doubtful accounts
The activity related to our allowance for doubtful accounts for trade and other receivables and finance
receivables is summarized as follows:
(in millions)
Allowance for doubtful accounts, at beginning of period . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-off of accounts(A)
$
$
$
104
29
(37)
113
50
(59)
101
65
(53)
Allowance for doubtful accounts, at end of period . . . . . . . . . . . . . . . . . . . . . . .
$
96
$
104
$
113
2010
2009
2008
(A) We repossess sold and leased vehicles on defaulted finance receivables and leases, and place them into Inventories. Losses recognized at
the time of repossession and charged against the allowance for doubtful accounts were $22 million, $44 million, and $37 million in 2010,
2009, and 2008, respectively.
Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on
non-accrual status. Most balances with specific loss reserves are also on a non-accrual status. In certain cases, we
continue to collect payments on our impaired finance receivables.
Information regarding impaired finance receivables as of October 31:
(in millions)
Impaired finance receivables with specific loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impaired finance receivables without specific loss reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specific loss reserves on impaired finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance receivables on non-accrual status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average balance of impaired finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
$
50$
1
23
51
87
84
3
36
89
83
The components of the allowance for doubtful accounts by receivable type are as follows as of October 31:
(in millions)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
39$
41
14
2
96$
47
45
11
1
104
2010
2009
93
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
6. Finance receivables
Finance receivables are receivables of our financial services operations, which generally can be repaid without
penalty prior to contractual maturity. Total finance receivables reported on the Consolidated Balance Sheets are
net of an allowance for doubtful accounts.
The primary business of our financial services operations is to provide wholesale, retail, and lease financing for
new and used trucks sold by us and our dealers and, as a result, our finance receivables and leases are
concentrated in the trucking industry. On a geographic basis, there is not a disproportionate concentration of
credit risk in any area of the U.S. or other countries where we have financial service operations. We retain as
collateral an ownership interest in the equipment associated with leases and, on our behalf and the behalf of the
various trusts, we maintain a security interest in equipment associated with generally all finance receivables. All
of the assets of our financial services operations are restricted through security agreements to benefit the creditors
of the respective finance subsidiary. As a result of the July 31, 2010 amendment to the Master Trust, the assets
and liabilities of the trust have been included in our Consolidated Balance Sheet. Total on-balance sheet assets of
our financial services operations net of intercompany balances are $3.3 billion and $3.9 billion, at October 31,
2010 and 2009, respectively. Included in total assets are on-balance sheet finance receivables of $2.9 billion and
$3.2 billion at October 31, 2010 and 2009, respectively.
In March 2010, we entered into a three-year Operating Agreement (with one-year automatic extensions and
subject to early termination provisions) with GE Capital Corporation and GE Capital Commercial, Inc.
(collectively “GE”). Under the terms of the agreement, GE became our preferred source of retail customer
financing for equipment offered by us and our dealers in the U.S. We provide GE a loss sharing arrangement for
certain credit losses. While under limited circumstances NFC retains the rights to originate retail customer
financing, we expect retail finance receivables and retail finance revenues will decline over the next five years as
our retail portfolio pays down.
As of October 31, our finance receivables by major classification are as follows:
(in millions)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts due from sales of receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total finance receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Current portion, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
$
187
1,560
271
905
53
2,976
(61)
2,915
(1,770)
341
2,110
277
245
291
3,264
(60)
3,204
(1,706)
Noncurrent portion, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,145
$
1,498
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.
94
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
As of October 31, 2010, contractual maturities of our finance receivables are as follows:
Accounts
Receivable
Retail
Notes
Finance
Leases
Whole-
Sale Notes
Due from
Sale of
Receivables
Total
(in millions)
Due in:
$
2010 . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . .
Gross finance receivables . . . . . . . . . . . . .
Unearned finance income . . . . . . . . . . . . . .
Total finance receivables . . . . . . . . . .
$
187
—
—
—
—
—
187
—
187
$
$
$
639
453
288
160
81
51
97
73
71
65
18
2
1,672
(112)
326
(55)
$
1,560
$
271
$
905
—
—
—
—
—
905
—
905
$
53
—
—
—
—
—
53
—
$
1,881
526
359
225
99
53
3,143
(167)
$
53
$
2,976
Securitizations
Our financial services operations transfer wholesale notes, retail accounts receivable, retail notes, finance leases,
and operating leases through SPEs, which generally are only permitted to purchase these assets, issue asset-
backed securities, and make payments on the securities. In addition to servicing receivables, our continued
involvement in the SPEs includes an economic interest in the transferred receivables and managing exposure to
interest rates using interest rate swaps, interest rate caps, and forward contracts. Certain sales of retail accounts
receivables are considered to be sales in accordance with guidance on accounting for transfers and servicing of
financial assets and extinguishment of liabilities, and are accounted for off-balance sheet. For sales that do
qualify for off-balance sheet treatment, an initial gain (loss) is recorded at the time of the sale while servicing
fees and excess spread income are recorded as revenue when earned over the life of the finance receivables.
We received net proceeds of $1.5 billion, $346 million, and $1.1 billion from securitizations of finance
receivables and investments in operating leases accounted for as secured borrowings in 2010, 2009, and 2008,
respectively.
Off-Balance Sheet Securitizations
Effective July 31, 2010, our Financial Services segment amended the wholesale trust agreement with the Master
Trust. The amendment disqualified the Master Trust as a QSPE and therefore required the Master Trust to be
evaluated for consolidation as a VIE. As we are the primary beneficiary of the Master Trust, the Master Trust’s
assets and liabilities are consolidated into the assets and liabilities of the Company. As a result of the amendment,
we recognized $337 million of receivables at fair value, net of intercompany eliminations, and retained interests
previously carried on our Consolidated Balance Sheet. Previously, these securitization transactions were
accounted for as sales and accordingly were not carried on our Consolidated Balance Sheets. In addition, we
recognized $210 million of restricted cash equivalents and $550 million of secured borrowings, net of
intercompany eliminations, as a result of the amendment.
We use the Master Trust, which provides for the funding of eligible wholesale notes through investor notes and
variable funding notes (“VFN”). The Master Trust owned $700 million of wholesale notes and $29 million of
cash equivalents as of October 31, 2010 and $763 million of wholesale notes as of October 31, 2009. The Master
Trust held $62 million and $96 million of wholesale notes with our Dealcors as of October 31, 2010 and 2009,
respectively.
95
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Components of available wholesale note trust funding facilities were as follows:
As of
Maturity
October 31,
2010
October 31,
2009
(in millions)
Investor notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable funding certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable funding notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 2011
Investor notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 2012
January 2012
Investor notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total wholesale note funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
—
500
350
250
$1,100
$212
650
—
—
—
$862
In November 2009, we completed the sale of $350 million of three-year investor notes within the wholesale note
trust funding facility. This sale was eligible for funding under the U.S. Federal Reserve Term Asset-Backed
Securities Loan Facility (“TALF”) program.
In February 2010, we completed the sale of $250 million of two-year investor notes within the wholesale note
trust funding facility. This sale was also eligible for funding under TALF. Also in February 2010, we paid off
previously issued investor notes of $212 million upon maturity.
In April 2010, the remaining balance in the variable funding certificate of $20 million was paid off and
refinanced under the VFN. In August 2010, the maturity of the VFN was extended to August 2011. As of
October 31, 2010, no funding was utilized under the VFN.
Unutilized funding related to the variable funding facilities was $500 million and $300 million at October 31,
2010 and 2009, respectively.
We use another SPE, TRAC, which utilizes a $100 million conduit funding arrangement that provides for the
funding of eligible retail accounts receivables. The SPE owned $54 million of retail accounts and $21 million of
cash equivalents as of October 31, 2010, and $89 million of retail accounts and $20 million of cash equivalents as
of October 31, 2009. There was $78 million and $92 million of unutilized funding at October 31, 2010 and 2009,
respectively. In October 2010, the maturity of the conduit was extended to January 2011.
Retained Interests in Off-Balance Sheet Securitizations
Retained interests in off-balance sheet securitizations represent our retained interest in the wholesale notes owner
trust prior to July 31, 2010, and TRAC facility off-balance sheet securitization transactions described above for
retail accounts. We transfer pools of finance receivables to various subsidiaries. The subsidiaries’ assets are
available to satisfy their creditors’ claims prior to such assets becoming available for the subsidiaries’ own uses
or to NFC or affiliated companies. We are under no obligation to repurchase any sold receivable that becomes
delinquent in payment or otherwise is in default. The terms of receivable sales generally require us to provide
credit enhancements in the form of receivables over-collateralization and/or cash reserves with the trusts and
conduits. Our use of such cash reserves is restricted under the terms of the securitized sales agreements. The
maximum exposure under all securitizations accounted for as sales is the fair value of the retained interests of
$53 million and $291 million as of October 31, 2010 and 2009, respectively.
We estimate the payment speeds for the receivables sold, the discount rate used to determine the fair value of our
retained interests and the anticipated net losses on the receivables in order to calculate the initial gain or loss on
96
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
the sale of the receivables. Estimates are based on historical experience, anticipated future portfolio performance,
market-based discount rates and other factors and are made separately for each securitization transaction. The fair
value of our retained interests is based on these assumptions. We re-evaluate the fair value of our retained
interests on a monthly basis and recognize in current income changes as required. Our retained interests are
recognized as an asset in Finance receivables, net.
The following is a summary of our retained interests, or amounts due from sales of receivables, as of October 31:
(in millions)
Excess seller’s interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest only strip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
32
—
21
Total amounts due from sales of receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
53
$
275
10
6
291
2010
2009
The key economic assumptions related to the valuation of our retained interests are as follows:
As of
October 31, 2010 October 31, 2009
(dollars in millions)
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Payment speed (percent of portfolio per month)
7.3%
—
88.5%
9.1 to 20.5%
0.0 to 0.24%
4.9 to 70.8%
The sensitivity of our retained interests to an immediate adverse change of 10 percent and 20 percent in each
assumption is not material. The effect of a variation of a particular assumption on the fair value of the retained
interests is calculated based upon changing one assumption at a time. Oftentimes however, changes in one factor
may result in changes in another, which in turn could magnify or counteract these reported sensitivities.
As of October 31, 2010, the assumptions relate only to the retail account securitization. As of October 31, 2009,
the lower end of the discount rate assumption range and the upper end of the payment speed assumption range
were used to value the retained interests in the retail account securitization. No percentage for estimated credit
losses was assumed for retail account securitizations as no losses have been incurred to date. The upper end of
the discount rate assumption range and the lower end of the payment speed assumption range were used to value
the retained interests in the wholesale note securitization facility at October 31, 2009.
97
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Finance Revenues
Finance revenues derived from receivables that are both on and off-balance sheet consist of the following:
(in millions)
Finance revenues from on-balance sheet receivables:
Retail notes and finance leases revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale notes interest
Retail and wholesale accounts interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total finance revenues from on-balance sheet receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenues from off-balance sheet securitization:
Fair value adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess spread income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing fees revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses on sale of finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securitization income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross finance revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Intercompany revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
183
33
39
18
—
273
37
32
6
(39)
—
36
309
(90)
$241
22
19
21
4
307
50
29
8
(48)
2
41
348
(79)
Finance revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
219
$269
Cash flows from off-balance sheet securitization transactions are as follows:
(in millions)
Proceeds from sales of finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash from net excess spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,509
6
32
—
$
4,178
8
31
1
$
4,456
9
17
4
Net cash from securitization transactions . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,547
$
4,218
$
4,486
2010
2009
2008
7. Inventories
As of October 31, the components of inventories are as follows:
(in millions)
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
893
202
473
840
214
612
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,568
$
1,666
2010
2009
98
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
8. Property and equipment, net
As of October 31, property and equipment, net included the following:
(in millions)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment
Furniture, fixtures, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2010
2009
$
55
366
70
2,242
202
361
74
53
376
74
2,056
182
405
86
Total property and equipment, at cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,370
(1,928)
3,232
(1,765)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,442
$
1,467
Certain of our property and equipment serve as collateral for borrowings. See Note 12, Debt, for description of
borrowings.
As of October 31, equipment leased to others and assets under financing arrangements and capital lease
obligations are as follows:
(in millions)
Equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment leased to others, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings, machinery, and equipment under financing arrangements and capital lease
obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets under financing arrangements and capital lease obligations, net . . . . . . . . . . . . .
2010
2009
$
$
$
$
361
(146)
215
123
(64)
59
$
$
$
$
405
(163)
242
139
(63)
76
For the years ended October 31, 2010, 2009, and 2008, depreciation expense, amortization expense related to
assets under financing arrangements and capital lease obligations, and interest capitalized on construction
projects are as follows:
(in millions)
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation of equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
2008
$
$
236
51
2
4
255
56
6
1
$
290
64
14
5
Certain depreciation expense on buildings used for administrative purposes is recorded in Selling, general and
administrative expenses.
99
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Capital Expenditures
At October 31, 2010 and 2009, respectively, commitments for capital expenditures in progress were $24 million
and $62 million. At October 31, 2010, 2009, and 2008, liabilities related to capital expenditures that are included
in accounts payable were $14 million, $12 million, and $18 million, respectively.
Leases
We lease certain land, buildings, and equipment under non-cancelable operating leases and capital leases
expiring at various dates through 2026. Operating leases generally have 1 to 25 year terms, with one or more
renewal options, with terms to be negotiated at the time of renewal. Various leases include provisions for rent
escalation to recognize increased operating costs or require us to pay certain maintenance and utility costs. Our
rent expense for the years ended October 31, 2010, 2009, and 2008 was $57 million, $54 million, and
$51 million, respectively. Rental income from subleases was $4 million, $5 million, and $2 million for the years
ended October 31, 2010, 2009, and 2008, respectively.
Future minimum lease payments at October 31, 2010, for those leases having an initial or remaining
non-cancelable lease term in excess of one year and certain leases that are treated as finance lease obligations, are
as follows:
(in millions)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing
Arrangements
and Capital
Lease
Obligations
$
110
36
65
20
1
4
236
Operating
Leases
Total
$
$
51
45
38
33
29
72
$
268
$
161
81
103
53
30
76
504
Less: Interest portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
221
Asset Retirement Obligations
We have a number of asset retirement obligations in connection with certain owned and leased locations,
leasehold improvements, and sale and leaseback arrangements. Certain of our production facilities contain
asbestos that would have to be removed if such facilities were to be demolished or undergo a major renovation.
The fair value of the conditional asset retirement obligations as of the balance sheet date has been determined to
be immaterial. Asset retirement obligations relating to the cost of removing improvements to leased facilities or
returning leased equipment at the end of the associated agreements are not material.
9. Impairment of property and equipment
In the fourth quarter of 2009, the Truck segment recognized $26 million and $5 million of charges for
impairments of property and equipment related to asset groups at our Chatham and Conway facilities,
respectively. The asset groups were reviewed for recoverability by comparing the carrying values to estimated
100
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
future cash flows and those carrying values were determined to not be fully recoverable. We utilized the cost
approach and market approach to determine the fair value of assets within the asset groups. The impairments at
our Chatham facility reflect a slower than expected recovery of industry volumes and the continuation of our
unresolved negotiations with the CAW. The impairments at our Conway facility are related to a strategic
decision we made in the fourth quarter of 2009 to transfer bus production to our Tulsa facility in 2010.
In 2008, the Engine segment recognized $358 million of charges for impairments of property and equipment
related to asset groups in the VEE Business Unit. The VEE Business Unit was comprised of the following asset
groups: the Huntsville Engine Plant (“HEP”), IEP, and the VEE asset group which included HEP, IEP, and ICC.
The asset groups were reviewed for recoverability by comparing the carrying values to estimated future cash
flows and those carrying values were determined to not be fully recoverable. We utilized the cost approach and
market approach to determine the fair value of certain assets within the asset groups. The other portions of the
asset groups’ fair values were based on estimates of future cash flows developed by management. Fair values for
the asset groups reflect significant reduction in demand from Ford for diesel engines produced at the VEE
Business Unit.
10. Goodwill and other intangible assets, net
As of October 31, 2010, we performed our annual impairment test for reporting units with goodwill. As part of
our impairment analysis for these reporting units, we determined the fair value of each of the reporting units
based on estimates of their respective future cash flows. The first step of our annual impairment test, which
compared the fair value of each of our reporting units to their respective carrying values, indicated no impairment
of goodwill as of October 31, 2010. Changes in the carrying amount of goodwill for each operating segment are
as follows:
Truck
Engine
Parts
Total
(in millions)
As of October 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of October 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of October 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
89
(4)
—
—
(1)
84
(2)
—
(7)
(1)
74
—
—
7
$
$
$
38
226
—
—
(36) —
(15) —
—
—
175
—
$
38
—
36
—
(5) —
—
—
$
38
206
5
—
(6) —
—
—
$
$
$
353
(4)
(36)
(15)
(1)
297
(2)
36
(12)
(1)
318
5
(6)
7
As of October 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
81
$
205
$
38
$
324
(A) Adjustments to goodwill primarily result from the tax benefit attributable to the amortization of tax deductible goodwill in excess of
goodwill recorded for financial statement purposes as measured in the MWM International (“MWM”) balance sheet immediately after its
acquisition in 2005. Goodwill was also reduced in 2008 due to the favorable tax settlement of a Brazilian court case. Goodwill in the
Truck segment was reduced in 2009 as a result of an adjustment to our purchase price for WCC as a result of receipt of escrow payments
for settlement of a dispute.
101
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Information regarding our intangible assets that are not subject to amortization as of October 31 is as follows:
(in millions)
Dealer franchise rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets not subject to amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
$
$
10$
59
69$
55
11
66
We have an agreement with a third-party engine manufacturer to acquire the rights to certain intellectual property
utilized in the production of our MaxxForce 11 and 13 engines for €30 million. The agreement requires us to pay
a royalty fee for each engine produced by us utilizing this technology until the €30 million is paid in full, but no
later than December 31, 2011. As of October 31, 2010 we owed a remaining balance of approximately
€21 million (21 million Euros, the equivalent of US$29.3 million at October 31, 2010).
Information regarding our intangible assets that are subject to amortization at October 31, 2010 and 2009 is as
follows:
As of October 31, 2010
(in millions)
Gross carrying value . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . . . . . . . . . . . . . . . . . .
Net of amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer
Base and
Relationships
Trademarks
Supply
Agreements
Other
Total
$ 194
(69)
$ 125
$
$
59
(15)
44
$
27
(27)
$ —
$
$
37
(13)
24
$
$
317
(124)
193
As of October 31, 2009
Customer
Base and
Relationships
Trademarks
Agreements Other
Total
Supply
(in millions)
Gross carrying value . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . . . . . . . . . . . . . . . . . . .
$ 190
(53)
Net of amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 137
$
$
59
(12)
47
$
27
(27)
$ 23 $
(9)
299
(101)
$ —
$ 14
$
198
We recorded amortization expense for our finite-lived intangible assets of $27 million, $27 million, and $25
million for the years ended October 31, 2010, 2009, and 2008, respectively. Total estimated amortization expense
for our finite-lived intangible assets for the next five years is as follows:
(in millions)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28
28
27
26
24
Estimated
Amortization
102
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
11. Investments in and advances to non-consolidated affiliates
Investments in and advances to non-consolidated affiliates is comprised of our interests in partially-owned
affiliates of which our ownership percentages range from 10 percent to 50 percent. We do not control these
affiliates, but have the ability to exercise significant influence over their operating and financial policies. Our
investment in these affiliates is an integral part of our operations, and we account for them using the equity
method of accounting.
We contributed $97 million and $44 million in new and incremental investments to these non-consolidated
affiliates during 2010 and 2009, respectively.
Prior to the Ford Settlement, our 49 percent interest in BDP and our 51 percent interest in BDT were included in
Investments in and advances to non-consolidated affiliates. Pursuant to the Ford Settlement, the equity interest in
each of BDP and BDT was increased to 75%. Effective as of June 1, 2009, BDP and BDT are accounted for as
consolidated subsidiaries. In 2009, equity in income of both BDP and BDT was $69 million and dividends from
both BDP and BDT were $78 million, including $26 million of non-cash dividends from BDT, through the date
of our increased equity interest. See Note 2, Ford settlement and related charges, and Note 4, Acquisition and
disposal of businesses, for further discussion.
The following table summarizes 100% of the combined assets, liabilities, and equity of our equity method
affiliates as of October 31:
(in millions)
Assets:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities and equity:
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partners’ capital and stockholders’ equity:
NIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total partners’ capital and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2010
2009
(Unaudited)
341
257
598
192
159
351
108
139
247
598
$
$
$
$
122
167
289
88
33
121
70
98
168
289
The following table summarizes 100% of the combined results of operations of our equity method affiliates for
the years ended October 31:
(in millions)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs, expenses, and income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .
(Unaudited)
659
$
755
(Unaudited)
727
$
643
(Unaudited)
1,406
$
1,236
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(96) $
84
$
170
2010
2009(A)
2008
(A) Includes amounts for BDP and BDT through June 1, 2009.
103
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
We recorded sales to certain of these affiliates totaling $121 million, $320 million, and $582 million in 2010,
2009, and 2008, respectively. We also purchased $394 million, $410 million, and $642 million of products and
services from certain of these affiliates in 2010, 2009, and 2008, respectively. In 2010, the majority of these sales
relate to NC2 Global, LLC (“NC2”). In 2009 and 2008, the majority of these sales and a substantial amount of
these purchases related to our Blue Diamond affiliates, prior to our consolidation of these entities.
Amounts due to and due from our affiliates arising from the sale and purchase of products and services as of
October 31 are as follows:
(in millions)
Receivables due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payables due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
$
57
91
$
11
50
As of October 31, 2010, our share of net undistributed losses in non-consolidated affiliates totaled $55 million.
Presented below is summarized financial information for NC2 , which is considered a significant
non-consolidated affiliate in 2010. NC2 was established in September 2009 as a joint venture with Caterpillar Inc.
and the carrying value of our investment in NC2 was $40 million and $1 million at October 31, 2010 and 2009,
respectively. Equity in (loss) income of non-consolidated affiliates includes losses of $36 million related to NC2
for the year ended October 31, 2010. Balance sheet information for NC2 was insignificant to our Consolidated
Balance Sheets.
Summarized statement of operations information for NC2 financial statements for the twelve months ended
October 31, 2010 is as follows:
(in millions)
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
(Unaudited)
$
63
135
(72)
(72)
Presented below is summarized financial information for BDP, which was considered a significant
non-consolidated affiliate in 2008. The carrying value of our investment in BDP was $9 million at October 31,
2008. Dividends received from BDP were $76 million for the year ended October 31, 2008. Equity in (loss)
income of non-consolidated affiliates includes BDP-related income of $85 million for the year ended October 31,
2008. Balance sheet information for BDP was insignificant to our Consolidated Balance Sheets. Effective as of
June 1, 2009, BDP is accounted for as a consolidated subsidiary.
Summarized statement of operations information from BDP’s financial statements for the twelve months ended
December 31, 2008 is as follows:
(in millions)
Net service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
(Unaudited)
$
190
15
175
174
104
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
12. Debt
(in millions)
Manufacturing operations
2010
2009
(Revised)(A)
8.25% Senior Notes, due 2021, net of unamortized discount of $35 and $37 at the
respective dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
965
$
963
3.0% Senior Subordinated Convertible Notes, due 2014, net of unamortized
discount of $94 and $114, at the respective dates . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt of majority-owned dealerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing arrangements and capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Agreement Related to 6.5% Tax Exempt Bonds, due 2040 . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
476
66
221
225
33
456
148
271
—
23
Total manufacturing operations debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,986
(145)
1,861
(191)
Net long-term manufacturing operations debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,841
$
1,670
Financial services operations
Asset-backed debt issued by consolidated SPEs, at various rates, due serially
through 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank revolvers, at fixed and variable rates, due dates from 2012 through 2015 . . . . .
Revolving retail warehouse facility, at variable rates, due 2010 . . . . . . . . . . . . . . . . .
Commercial paper, at variable rates, due serially through 2011 . . . . . . . . . . . . . . . . .
Borrowings secured by operating and finance leases, at various rates, due serially
through 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total financial services operations debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,731
974
—
67
112
2,884
(487)
1,227
1,518
500
52
134
3,431
(945)
Net long-term financial services operations debt . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,397
$
2,486
(A) Revised; See Note 1, Summary of significant accounting policies
Manufacturing Operations
In October 2010, we benefited from certain tax-exempt bond financings in which (i) the Illinois Finance
Authority issued and sold $135 million aggregate principal amount of Recovery Zone Facility Revenue Bonds
due October 15, 2040 and (ii) The County of Cook, Illinois issued and sold $90 million aggregate principal
amount of Recovery Zone Facility Revenue Bonds also due October 15, 2040; collectively the (“Tax Exempt
Bonds”). The Tax Exempt Bonds were issued pursuant to separate, but substantially identical, indentures of trust
dated as of October 1, 2010. The proceeds of the Tax Exempt Bonds were loaned by each issuer to the Company
pursuant to separate, but substantially identical, loan agreements dated as of October 1, 2010. The proceeds from
the issuance of the Tax Exempt Bonds are restricted, and must be used substantially for capital expenditures
related to financing the relocation of the Company’s headquarters, the expansion of an existing warehouse
facility, and the development of certain industrial and testing facilities, together with related improvements and
equipment (the “Projects”). The payment of principal and interest on the Tax Exempt Bonds are guaranteed
under separate, but substantially identical, bond guarantees issued by Navistar, Inc. The Tax Exempt Bonds are
special, limited obligations of each issuer, payable out of the revenues and income derived under the related loan
agreements and related guarantees. The Tax Exempt Bonds bear interest at the fixed rate of 6.50% per annum,
payable each April 15 and October 15, commencing April 15, 2011. Beginning on October 15, 2020, the Tax
105
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Exempt Bonds are subject to optional redemption at the direction of the Company, in whole or in part, at the
redemption price equal to 100% of the principal amount thereof, plus accrued interest, if any, to the redemption
date. The funds received from the issuance of the Tax Exempt Bonds were deposited directly into trust accounts
by the bonding authority at the time of issuance, which will be remitted to the Company on a reimbursement
basis as we make qualified capital expenditures related to the Projects. As the Company does not have the ability
to use these funds for general operating purposes, they are classified as Other noncurrent assets in our
Consolidated Balance Sheets. In addition, as the Company did not receive cash proceeds upon the closing of the
Tax Exempt Bonds, there was no impact on the Consolidated Statement of Cash Flows for the year ended
October 31, 2010. As the Company makes qualifying capital expenditures and is reimbursed by the Trust, the
Company will report the corresponding amounts as capital expenditures and proceeds from issuance of debt
within the Consolidated Statement of Cash Flows. Of the $225 million of Tax Exempt Bonds, no amounts were
expended at October 31, 2010. In November 2010, we finalized the purchase of the property and buildings that
we intend to develop into our new world headquarters site.
In October 2009, we completed the sale of $1.0 billion aggregate principal amount of our 8.25% Senior Notes
due 2021 (the “Senior Notes”). Interest is payable on May 1 and November 1 of each year until the maturity date
of November 1, 2021. The Company received net proceeds of approximately $947 million, net of offering
discount of $37 million and underwriter fees of $16 million. The discount and debt issue costs are being
amortized to Interest expense over the life of the Senior Notes for an effective rate of 8.96%, and the debt issue
costs are recorded in Other noncurrent assets. The proceeds, in conjunction with the proceeds of the concurrent
3.0% Senior Subordinated Convertible Notes due 2014 (the “Convertible Notes”) discussed below, were used to
repay all amounts outstanding under the prior $1.5 billion five-year term loan facility and synthetic revolving
facility (the “Facilities”), as well as certain fees incurred in connection therewith. The Senior Notes are senior
unsecured obligations of the Company.
The Senior Notes contain an optional redemption feature allowing the Company at any time prior to November 1,
2012 to redeem up to 35% of the aggregate principal amount of the notes using proceeds of certain public equity
offerings at a redemption price of 108.25% of the principal amount of the notes, plus accrued and unpaid interest,
if any. On or after November 1, 2014, the Company can redeem all or part of the Senior Notes during the twelve-
month period beginning on November 1, 2014, 2015, 2016, 2017, and thereafter at a redemption price equal to
104.125%, 102.750%, 101.375%, and 100%, respectively, of the principal amount of the notes redeemed. In
addition, not more than once during each twelve-month period ending on November 1, 2010, 2011, 2012, 2013,
and 2014, the Company may redeem up to $50 million in principal amount of the notes in each such twelve-
month period, at a redemption price equal to 103% of the principal amount of the notes redeemed, plus accrued
and unpaid interest, if any.
The Company may also redeem the Senior Notes at its election in whole or part at any time prior to November 1,
2014 at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium, plus
accrued and unpaid interest, to the redemption date. The Applicable Premium is defined as the greater of: 1% of
the principal amount and the excess, if any, of (i) the present value as of such date of redemption of (A) the
redemption price of such note on November 1, 2014, plus (B) all required interest payments due on such note
through November 1, 2014, computed using a discount rate equal to the Treasury Rate (as defined in the debt
agreement), plus 50 basis points over (ii) the then-outstanding principal of such note.
In October 2009, we also completed the sale of $570 million aggregate principal amount of our Convertible
Notes, including over-allotment options. Interest is payable on April 15 and October 15 of each year until the
maturity date of October 15, 2014. The Company received net proceeds of approximately $553 million, net of
$17 million of underwriter fees. The debt issue costs are recorded in Other noncurrent assets and are being
106
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
amortized to Interest expense over the life of the Convertible Notes. The Convertible Notes are senior
subordinated unsecured obligations of the Company.
As of November 1, 2009, we adopted new guidance on the accounting for convertible debt instruments that may
be settled in cash upon conversion (including partial cash settlement), which requires issuers of convertible debt
securities within its scope to separate these securities into a debt component and an equity component, resulting
in the debt component being recorded at estimated fair value without consideration given to the conversion
feature. Issuance costs are also allocated between the debt and equity components. The guidance requires that
convertible debt within its scope reflect a company’s nonconvertible debt borrowing rate when interest expense
is recognized. The provisions of the guidance were retrospective upon adoption. The adoption of the guidance on
November 1, 2009 impacted the accounting treatment of the Company’s Convertible Notes by reclassifying a
portion of the original principal amount of the Convertible Notes’ balance to additional paid in capital, resulting
in a discount on the Convertible Notes that will be amortized through interest expense over the life of the notes.
We estimated the fair value of the liability component at $456 million with a discount on the Convertible Notes
of $114 million at the date of issuance. Of the $18 million of debt issuance costs, we allocated $14 million and
$4 million to the liability component and equity component, respectively. Our Consolidated Balance Sheet as of
October 31, 2009 was retroactively revised to reflect the increase to Additional paid in capital of $110 million,
the reduction in Long-term debt for the debt discount of $114 million, and the reduction in Other noncurrent
assets for the equity component of debt issuance costs of $4 million. The resulting debt discount is amortized as
interest expense and therefore reduces net income and basic and diluted earnings per share. The effective interest
rate on the Convertible Notes will be 8.42% with the amortization of debt discount and debt issuance costs. As a
result of the short period the debt was outstanding, adoption of the guidance did not have a material impact on
our Consolidated Statement of Operations for the year ended October 31, 2009.
Holders may convert the Convertible Notes into common stock of the Company at any time on or after April 15,
2014. Holders may also convert the Convertible Notes at their option prior to April 15, 2014, under the following
circumstances: (i) during any fiscal quarter commencing after January 31, 2010, if the last reported sale price of
the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive
trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the
applicable conversion price on each such trading day; (ii) during the five business day period after any five
consecutive trading day period (the “Measurement Period”) in which the trading price per $1,000 principal
amount of notes for each trading day of that Measurement Period was less than 98% of the product of the last
reported sale price of the common stock and the applicable conversion rate on each such trading day; or
(iii) upon the occurrence of specified corporate events, as more fully described in the Convertible Indenture. The
conversion rate will initially be 19.8910 shares of common stock per $1,000 principal amount of Convertible
Notes (equivalent to an initial conversion price of approximately $50.27 per share of common stock). The
conversion rate may be adjusted for anti-dilution provisions and the conversion price may be decreased by the
Board of Directors to the extent permitted by law and listing requirements.
The Convertible Notes can be settled in common stock, cash, or a combination of common stock and cash. Upon
conversion, the Company will satisfy its conversion obligations by delivering, at its election, shares of the
common stock (plus cash in lieu of fractional shares), cash, or any combination of cash and shares of the
common stock. If the Company elects to settle in cash or a combination of cash and shares, the amounts due upon
conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a
40 trading-day observation period. If a holder converts its Convertible Notes on or after April 15, 2014, and the
Company elects physical settlement as described above, the holder will not receive the shares of common stock
into which the Convertible Notes are convertible until after the expiration of the observation period described
above, even though the number of shares the holder will receive upon settlement will not change. It is our policy
107
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
to settle the principal and accrued interest on the Convertible Notes with cash. Subject to certain exceptions,
holders may require the Company to repurchase, for cash, all or part of the Convertible Notes at a price equal to
100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest.
In connection with the sale of the Convertible Notes, the Company purchased call options for $125 million. The
call options cover 11,337,870 shares of common stock, subject to adjustments, at a strike price of $50.27. The
call options are intended to minimize share dilution associated with the Convertible Notes. In addition, in
connection with the sale of the Convertible Notes, the Company also entered into separate warrant transactions
whereby, the Company sold warrants for $87 million to purchase in the aggregate 11,337,870 shares of common
stock, subject to adjustments, at an exercise price of $60.14 per share of common stock. As the call options and
warrants are indexed to our common stock, we recognized them in permanent equity in Additional paid in
capital, and will not recognize subsequent changes in fair value as long as the instruments remain classified as
equity.
In January 2007, we entered into Facilities, and borrowed an aggregate principal amount of $1.3 billion under the
Facilities. The proceeds were used to repay all amounts outstanding under the prior three year unsecured $1.5
billion loan facility, as well as certain fees incurred in connection therewith. The Facilities were repaid in
October 2009.
In June 2007, we signed a definitive loan agreement relating to a five-year senior inventory-secured, asset-based
revolving credit facility in an aggregate principal amount of $200 million. This loan facility matures in June 2012
and is secured by certain of our domestic manufacturing plant inventory and service parts inventory as well as
our used truck inventory. All borrowings under this loan facility accrue interest at a rate equal to a base rate or an
adjusted London Interbank Offered Rate (“LIBOR”) plus a spread. The spread, which is based on an availability-
based measure, ranges from 25 to 75 basis points for Base Rate borrowings and from 125 to 175 basis points for
LIBOR borrowings. The LIBOR spread as of October 31, 2010 was 125 to 175 basis points. Borrowings under
this facility are available for general corporate purposes. As of October 31, 2010, we had no borrowings under
this facility. There were no defaults or Events of Default incurred under the loan agreement as we were, and
continue to be, in compliance with all the covenants contained in the definitive loan agreement.
Our majority-owned dealerships incur debt to finance their inventories, property, and equipment. The various
dealership debt instruments have interest rates that range from 5.6% to 12% and maturities that extend to 2016.
Included in our financing arrangements and capital lease obligations are financing arrangements of $203 million
and $262 million as of October 31, 2010 and 2009, respectively. These arrangements involve the sale and
leaseback of manufacturing equipment considered integral equipment. Accordingly, these arrangements are
accounted for as financings. Inception dates of these arrangements range from December 1999 to June 2002,
remaining terms range from 10 months to 4 years, effective interest rates vary from 3.2% to 9.4%, and buyout
option exercise dates ranged from December 2005 to June 2009. In addition, the amount of financing
arrangements and capital lease obligations include $18 million and $9 million of capital leases for real estate and
equipment as of October 31, 2010 and October 31, 2009, respectively. Interest rates used in computing the net
present value of the lease payments under capital leases ranged from 4.0% to 10.3%.
Financial Services Operations
Effective July 31, 2010, the terms of the wholesale trust agreement were amended to allow NFC, as transferor, an
element of control over the transferred receivables and control over eligibility of receivables available for
transfer. This amendment disqualifies the Master Trust as a QSPE and therefore disqualifies transfers of
108
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
receivables to the Master Trust from sale accounting treatment. As of July 31, 2010, liabilities of the trust of
$600 million have been recognized as borrowings secured by the underlying receivables. For additional
information, see Note 6, Finance receivables.
In May 2010, our wholly owned subsidiary Navistar Financial Retail Receivables Corporation (“NFRRC”)
issued secured notes for $919 million. A portion of the proceeds were used to pay off certain existing retail
secured borrowings and the remaining portion was used to pay off the revolving retail warehouse facility within
the Truck Retail Installment Paper Corporation (“TRIP”) of $500 million at maturity on June 15, 2010. In
October 2010, NFRRC issued secured notes for $290 million. These proceeds were used primarily to pay-off
certain existing secured borrowings and closeout the related interest rate swap position.
In December 2009, NFC’s Revolving Credit Agreement dated March 2007, as amended, (“Credit Agreement”)
was refinanced with a $815 million, three year facility that matures in December 2012, with an interest rate of
LIBOR plus 425 basis points. The new facility contains a term loan of $365 million and a revolving loan of $450
million with a Mexican sub-revolver of $100 million which was used by NIC’s Mexican financial services
operations. Under the new agreement, NFC is subject to customary operational and financial covenants including
an initial minimum collateral coverage ratio of 120%, increasing to 135% effective November 2010, and 150%
effective November 2011. Concurrent with the bank credit facility refinancing in December 2009, Navistar
Financial Asset Sales Corporation issued borrowings secured by asset backed securities of $225 million and NFC
issued a term loan secured by retail notes and leases of $79 million with monthly scheduled principal payments
through March 2013, with weighted average interest rates of 5.7% and 5.9%, respectively.
The Credit Agreement had two primary components, a term loan of $620 million and a revolving bank loan of
$800 million. The revolving bank loan had a Mexican sub-revolver of $100 million. Under the terms of the
Credit Agreement, NFC was required to maintain specified financial covenants. The Credit Agreement granted
security interests in substantially all of NFC’s unsecuritized assets to the participants in the Credit Agreement.
Compensating cash balances were not required. Facility fees of 0.375% were paid quarterly on the revolving loan
portion only, regardless of usage. In addition, the terms of the Credit Agreement limited the amount of dividends
permitted to be paid from NFC to Navistar, Inc. As of October 31, 2009, no dividends were available for
distribution to Navistar, Inc.
TRIP, a special purpose, wholly-owned subsidiary of NFC, had a $500 million revolving retail facility that
matured and was paid in June 2010. The facility was subject to optional early redemption in full without penalty
or premium upon satisfaction of certain terms and conditions on any date on or after April 15, 2010. NFC used
TRIP to temporarily fund retail notes and retail leases, other than operating leases, and this facility was used
primarily during the periods prior to the securitization of retail notes and finance leases. NFC retained a
repurchase option against the retail notes and leases sold into TRIP; therefore, TRIP’s assets and liabilities were
included in our Consolidated Balance Sheets. As of October 31, 2009, NFC had $301 million in retail notes and
finance leases in TRIP.
The majority of asset-backed debt is issued by consolidated SPEs and is payable out of collections on the finance
receivables sold to the SPEs. This debt is the legal obligation of the SPEs and not NFC. The balance outstanding
was $1.7 billion and $1.2 billion as of October 31, 2010 and 2009, respectively. The carrying amount of the retail
notes, wholesale notes and finance leases used as collateral was $1.9 billion and $1.3 billion as of October 31,
2010 and 2009, respectively. In November 2009, we exercised our right to pay off retail securitization debt of
$67 million in advance of final maturity.
NFC enters into secured borrowing agreements involving vehicles subject to operating and finance leases with
retail customers. The balances are classified under financial services operations debt as borrowings secured by
leases. In connection with the securitizations and secured borrowing agreements of certain of its leasing portfolio
109
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
assets, NFC and its subsidiary, Navistar Leasing Services Corporation (“NLSC”), have established Navistar
Leasing Company (“NLC”), a Delaware business trust. NLC holds legal title to leased vehicles and is the lessor
on substantially all leases originated by NFC. NLSC owns beneficial interests in the titles held by NLC and has
transferred other beneficial interests issued by NLC to purchasers under secured borrowing agreements and
securitizations. Neither the beneficial interests held by purchasers under secured borrowing agreements or the
assets represented thereby, nor legal interest in any assets of NLC, are available to NLSC, NFC, or its creditors.
The balance of the secured borrowings issued by NLC totaled $7 million and $9 million as of October 31, 2010
and 2009, respectively.
International Truck Leasing Corporation (“ITLC”), a special purpose, wholly-owned subsidiary of NFC, provides
NFC with another entity to obtain borrowings secured by leases. The balances are classified under financial
services operations debt as borrowings secured by leases. ITLC’s assets are available to satisfy its creditors’
claims prior to such assets becoming available for ITLC’s use or to NFC or affiliated companies. The balance of
these secured borrowings issued by ITLC totaled $105 million and $125 million as of October 31, 2010 and
2009, respectively. The carrying amount of the finance and operating leases used as collateral was $107 million
and $105 million as of October 31, 2010 and 2009, respectively. ITLC does not have any unsecured debt.
We borrow funds denominated in U.S. dollars and Mexican pesos to be used for investment in our Mexican
financial services operations. As of October 31, 2010, borrowings outstanding under these arrangements were
$295 million, of which 17% is denominated in dollars and 83% in pesos. As of October 31, 2009, borrowings
outstanding under these arrangements were $338 million, of which 26% is denominated in dollars and 74% in
pesos. The interest rates on the dollar-denominated debt are at a negotiated fixed rate or at a variable rate based
on LIBOR, and the interest rates on peso-denominated debt are based on the Interbank Interest Equilibrium Rate.
As of October 31, 2010 and 2009, these borrowings included commercial paper of $67 million and $52 million,
respectively. The remaining borrowings are effectively secured by the Mexican finance receivables.
Future Maturities
The aggregate contractual annual maturities for debt as of October 31, 2010, are as follows:
(in millions)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Unamortized discount
Manufacturing
Operations
Financial
Services
Operations
Total
$
145
41
98
599
2
1,230
2,115
(129)
$
487
955
906
354
26
156
2,884
—
$
632
996
1,004
953
28
1,386
4,999
(129)
Net debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,986
$
2,884
$
4,870
Debt and Lease Covenants
We have certain public and private debt agreements, including the indenture for our Senior Notes and the Tax
Exempt Bonds, which limit our ability to incur additional indebtedness, pay dividends, buy back our stock, and
take other actions. The terms of our Convertible Notes do not contain covenants that could limit the amount of
110
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
debt we may issue, or restrict us from paying dividends or repurchasing our other securities. However, the
Convertible Notes Indenture defines circumstances under which the Company would be required to repurchase
the Convertible Notes and includes limitations on consolidation, merger, and sale of the Company’s assets. As of
October 31, 2010, we were in compliance with these covenants.
We are also required under certain agreements with public and private lenders of NFC to ensure that NFC and its
subsidiaries maintain their income before interest expense and income taxes at not less than 125% of their total
interest expense. Under these agreements, if NFC’s consolidated income, including capital contributions made by
NIC or Navistar, Inc., before interest expense and income taxes is less than 125% of its interest expense (“fixed
charge coverage ratio”), NIC or Navistar, Inc. must make payments to NFC to achieve the required ratio. During
the year ended October 31, 2010, no such payments were made. In 2009, $20 million of such payments were
required and made from Navistar, Inc. to NFC to ensure compliance with the covenant.
Our Mexican financial services operations also have debt covenants, which require the maintenance of certain
financial ratios. As of October 31, 2010, we were in compliance with those covenants.
111
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
13. Postretirement benefits
Defined Benefit Plans
We provide postretirement benefits to a substantial portion of our employees. Costs associated with
postretirement benefits include pension and postretirement health care expenses for employees, retirees, and
surviving spouses and dependents.
Obligations and Funded Status
A summary of the changes in benefit obligations and plan assets is as follows:
(in millions)
Change in benefit obligations
Benefit obligations at beginning of year . . . . . . . . . . . . . . . . . . .
Amendments and administrative charges . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements and curtailments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual termination benefits . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . .
Subsidy receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligations at end of year . . . . . . . . . . . . . . . . . . . . . . . .
Change in plan assets
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . .
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts recognized in our Consolidated Balance Sheets
consist of:
Current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net liability recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts recognized in our accumulated other
comprehensive loss consist of:
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net prior service cost (benefit) . . . . . . . . . . . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
(A) Revised; See Note 1, Summary of significant accounting policies.
112
Pension Benefits
Health and Life
Insurance Benefits
2010
2009
2010
2009
(Revised)(A)
$
$
$
3,850
4
18
209
253
(3)
1
1
—
—
(328)
4,005
2,317
369
(4)
115
(318)
$
$
$
3,054
4
15
234
827
6
9
—
—
—
(299)
3,850
2,268
301
—
37
(289)
1,631
(341)
8
81
(89)
2
(2)
—
32
15
(175)
1,162
473
78
—
2
(44)
$
$
$
1,443
—
6
117
203
—
3
—
31
23
(195)
1,631
464
63
—
3
(57)
473
2,479
$
2,317
$
509
$
(1,526) $
(1,533) $
(653) $
(1,158)
(10) $
(10) $
(1,516)
(1,523)
(72) $
(581)
(86)
(1,072)
(1,526) $
(1,533) $
(653) $
(1,158)
1,900
8
1,908
$
$
1,920
5
1,925
$
$
$
92
(352)
(260) $
227
(32)
195
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The accumulated benefit obligation for pension benefits, a measure that excludes the effect of prospective salary
and wage increases, was $3.9 billion and $3.8 billion at October 31, 2010 and 2009, respectively.
The postretirement benefit adjustment included in the Consolidated Statements of Stockholders’ Deficit as of
October 31, 2010 is net of the residual effect of a change in judgment regarding the recoverability of U.S.
deferred taxes generated prior to 2002 of $326 million and $2 million of deferred taxes related to the Company’s
foreign postretirement benefit plans.
Information for pension plans with accumulated benefit obligations in excess of plan assets were as follows:
(in millions)
Projected benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,005
3,942
2,479
(Revised)(A)
3,850
$
3,781
2,317
2010
2009
(A) Revised; See Note 1, Summary of significant accounting policies.
Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with
applicable U.S. and Canadian government regulations and to make additional contributions from time to time. As
of October 31, 2010, we have met all regulatory minimum funding requirements. In 2010, we contributed $115
million to our pension plans to meet regulatory minimum funding requirements. We expect to contribute $178
million to our pension plans during 2011.
We primarily fund other post-employment benefit (“OPEB”) obligations, such as retiree medical, in accordance
with a 1993 legal agreement, which requires us to fund a portion of the plans’ annual service cost. In 2010, we
contributed $2 million to our OPEB plans to meet legal funding requirements. We expect to contribute $2 million
to our OPEB plans during 2011.
We have certain unfunded pension plans, under which we make payments directly to employees. Benefit
payments of $10 million in 2010 and 2009 are included within the amount of “Benefits paid” in the “Change in
benefit obligation” section above, but are not included in the “Change in plan assets” section, because the
payments are made directly by us and not by separate trusts that are used in the funding of our other pension
plans.
We also have certain OPEB benefits that are paid from Company assets (instead of trust assets). Payments from
Company assets, net of participant contributions and subsidy receipts, result in differences between benefits paid
as presented under “Change in benefit obligation” and “Change in plan assets” of $84 million for 2010 and 2009.
Components of Net Periodic Benefit Expense (Income) and Other Amounts Recognized in Other
Comprehensive Loss (Income)
The components of our postretirement benefits (income) expense included in our Consolidated Statements of
Operations for the years ended October 31 consist of the following:
(in millions)
Pension expense (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health and life insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total postretirement benefits expense (income) . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
2008
$
$
142
37
179
$
$
154
79
233
$
$
(94)
52
(42)
113
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Net postretirement benefits expense included in our Consolidated Statements of Operations, and other amounts
recognized in other comprehensive loss (income), for the years ended October 31 is comprised of the following:
Pension Expense (Income)
Health and Life Insurance
Expense
2010
2009
2008
2010
2009
2008
(in millions)
Service cost for benefits earned during the period . . . $
Interest on obligation . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of cumulative loss (gain) . . . . . . . . . . .
Amortization of prior service cost (benefit) . . . . . . . .
Settlements and curtailments . . . . . . . . . . . . . . . . . . .
Contractual termination benefits . . . . . . . . . . . . . . . . .
Premiums on pension insurance . . . . . . . . . . . . . . . . .
Less: Expected return on plan assets . . . . . . . . . . . . .
(Revised)(A)
15
234
72
1
6
9
6
(189)
18 $
209
98
1
1
1
7
(193)
(Revised)(A)
$
23 $
221
13
2
(41)
5
2
(319)
8 $
81
8
(20)
2
(2)
—
(40)
117
6 $
13
113
(2) —
(5)
(6)
(3)
2
—
(67)
—
3
—
(40)
Net postretirement benefits expense
(income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
142 $
154
$
(94) $
37 $
79 $
52
Other changes in plan assets and benefit
obligations recognized in other comprehensive
loss (income)
Actuarial net loss (gain) . . . . . . . . . . . . . . . . . . . $
Amortization of cumulative gain (loss) . . . . . . .
Prior service cost (benefit) . . . . . . . . . . . . . . . . .
Amortization of prior service benefit (cost) . . . .
Settlements and curtailments . . . . . . . . . . . . . . .
Minimum pension liability . . . . . . . . . . . . . . . . .
77 $
(98)
4
(1)
(3)
—
713
(72)
4
(1)
—
—
Total recognized in other comprehensive loss
(income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(21) $
644
Total net postretirement benefits expense (income)
and other comprehensive loss (income) . . . . . . . . . $
121 $
798
$
$
$
(A) Revised; See Note 1, Summary of significant accounting policies
781 $
(13)
3
(2)
6
—
180 $ (130)
(127) $
(8)
(341) —
20
—
—
—
—
2
5
—
—
—
6
8
775 $
(456) $
187 $ (116)
681 $
(419) $
266 $
(64)
On October 30, 2010, our UAW represented employees ratified a new four-year labor agreement that replaced
the prior contract that expired October 1, 2010. As a result of the contract ratification, the Company recognized
$3 million of contractual termination benefits for pension in the fourth quarter of 2010.
On March 18, 2010, the Company made an administrative change to the prescription drug program under the
OPEB plan affecting plan participants who are Medicare eligible. Effective July 1, 2010, the Company enrolled
Medicare eligible plan participants who did not opt out into a Medicare Part D Plan. The OPEB plan now
supplements the coverage provided by the Medicare Part D Plan. As a result of this change, effective July 1,
2010 for substantially all of the Medicare eligible participants, the Company is no longer eligible to receive the
Medicare Part D subsidy that is available to sponsors of retiree healthcare plans that provide prescription drug
benefits that are at least actuarially equivalent to Medicare Part D.
The impact of the plan change, which is net of the subsidy elimination, decreased the APBO by $340 million and
was accounted for as prior service credit as a component of Accumulated other comprehensive loss. As discussed
in Note 17, Commitments and contingencies, the UAW has filed a motion contesting our ability to
114
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
implement this administrative change. In addition, the Company filed a complaint arguing that it has not received
the consideration it was promised in the 1993 restructured health and life legal settlement.
On March 23, 2010, the Patient Protection and Affordable Care Act (“PPACA”) was enacted and on March 30,
2010 the Health Care and Education Reconciliation Act of 2010 (“HCERA”) was enacted, which amends certain
aspects of the PPACA. The impact of these Acts was measured at March 31, 2010 and was thought to be an
increase to the APBO of $86 million that was accounted for as an actuarial loss. At October 31, 2010 the
Company revised its estimate due to subsequent clarification of the aforementioned legislation. The impact was a
reduction in the APBO of $272 million accounted for as an actuarial gain. This change in estimate was
attributable to the phased-in closing of the Medicare Part D coverage gap and the manufacturer brand name drug
discounts in the coverage gap. As regulations regarding implementation of the health care reform legislation are
promulgated and additional guidance becomes available, our estimates may change.
In addition, in March 2010 the Company recognized a charge of $2 million which was primarily curtailment
charges related to the retiree medical plan due to the planned terminations of certain salaried employees in
conjunction with NFC’s U.S. financing alliance with GE.
As discussed in Note 2, Ford settlement and related charges, the Company previously committed to close IEP
and ICC. Our commitment to close the plants resulted in a charge of $16 million during the first quarter of 2009
representing a plan curtailment and related contractual termination benefits. In July 2010, we reached an
agreement with ICC employees represented by the UAW and will now continue operations at ICC. As a result,
we have reversed $4 million of charges for pension and OPEB contractual termination benefits that were
associated with the previously planned action.
In addition to the plan curtailment and related contractual termination benefits resulting from the Ford
Settlement, the Company recognized an additional $2 million of contractual termination benefits related to the
terminations of certain salaried employees in December 2008.
On December 16, 2007, the majority of Company employees represented by the UAW voted to ratify a new
contract that ran through September 30, 2010. Among the changes, as compared to the prior contract, was the
cessation of annual lump sum payments that had been made to certain retirees. We had accounted for such
payments as a defined benefit plan based on the historical substance of the underlying arrangement. The
elimination of these payments and other changes resulted in a net settlement and curtailment of the plan resulting
in income of $42 million, which is presented as a reduction of Selling, general and administrative expenses, for
the year ended October 31, 2008.
During the third quarter of 2008, the Engine segment’s Indianapolis plant laid off over 400 employees. That
layoff was driven by a reduction in Ford’s production schedules that management believed, at that time, to be
temporary. In the fourth quarter of 2008, the Company concluded that it was probable that those employees, as
well as other employees from the facility laid off prior to the third quarter, would not return to work. As such, the
Company recognized net charges of $5 million representing curtailments and contractual termination benefits for
the plans for the year ended October 31, 2008.
115
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The estimated amounts for the defined benefit pension plans and the other postretirement benefit plans that will
be amortized from AOCL into net periodic benefit expense over the next fiscal year are as follows:
Health
and Life
Insurance
Benefits
Pension
Benefits
(in millions)
Amortization of prior service cost (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of cumulative losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1
101
$ (31)
—
Cumulative unrecognized actuarial gains and losses for postretirement benefit plans, where substantially all of
the plan participants are inactive, are amortized over the average remaining life expectancy of the inactive plan
participants. Otherwise, cumulative gains and losses are amortized over the average remaining service period of
active employees.
Plan amendments unrelated to negotiated labor contracts are amortized over the average remaining service period
of active employees or the remaining life expectancy of the inactive participants based upon the nature of the
amendment and the participants impacted. Plan amendments arising from negotiated labor contracts are
amortized over the length of the contract.
Assumptions
The weighted average rate assumptions used in determining benefit obligations for the years ended October 31,
2010 and 2009 were:
Pension Benefits
Health and Life
Insurance Benefits
2010
2009
2010
2009
Discount rate used to determine present value of benefit obligation at end of
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected rate of increase in future compensation levels . . . . . . . . . . . . . . . . . .
4.8% 5.4% 4.6% 5.5%
3.5% 3.5% —
—
The weighted average rate assumptions used in determining net postretirement benefits expense for 2010, 2009,
and 2008 were:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term rate of return on plan assets . .
Expected rate of increase in future compensation
Pension Benefits
Health and Life Insurance Benefits
2010
2009
2008
2010
2009
2008
5.4% 7.6%(A)
8.5% 9.0%
6.0%
9.0%
5.6%(B)
8.4%
8.5% 9.0%
6.1%
9.0%
levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.5% 3.5%
3.5% —
—
—
(A) The weighted average discount rate used to compute the expense for the period of November 1, 2008 through January 31, 2009 was
8.3%. Due to a plan remeasurement at January 31, 2009 at a rate of 6.5%, the weighted average discount rate for the full fiscal year 2009
was 7.6%.
(B) The weighted average discount rate used to compute the expense for the period of November 1, 2009 through March 31, 2010 was 5.5%.
Due to a plan remeasurement at March 31, 2010 at a rate of 5.6%, the weighted average discount rate for the full fiscal year 2010 was
5.6%.
116
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The actuarial assumptions used to compute the net postretirement benefits expense (income) are based upon
information available as of the beginning of the year, specifically market interest rates, past experience, and our
best estimate of future economic conditions. Changes in these assumptions may impact the measurement of
future benefit costs and obligations. In computing future costs and obligations, we must make assumptions about
such things as employee mortality and turnover, expected salary and wage increases, discount rates, expected
returns on plan assets, and expected future cost increases. Three of these items have a significant impact on the
level of expense recognized: (i) discount rates, (ii) expected rates of return on plan assets, and (iii) healthcare cost
trend rates.
We estimate the discount rate for our U.S. pension and OPEB obligations by matching anticipated future benefit
payments for the plans to the Citigroup yield curve to establish a weighted average discount rate for each plan.
We determine our assumption as to expected return on plan assets by evaluating both historical returns as well as
estimates of future returns. Specifically, we analyze the average historical broad market returns for various
periods of time over the past 100 years for equities and over a 30-year period for fixed income securities, and
adjust the computed amount for any expected changes in the long-term outlook for both the equity and fixed
income markets. We consider the current asset mix as well as our targeted asset mix when establishing the
expected return on plan assets.
Health care cost trend rates have been established through a review of actual recent cost trends and projected
future trends. Our retiree medical and drug trend assumptions are our best estimate of expected inflationary
increases to healthcare costs. Due to the number of former employees and their beneficiaries included in our
retiree population (approximately 41,000), the trend assumptions are based upon both our specific trends and
nationally expected trends.
The weighted average rate of increase in the per capita cost of postretirement health care benefits provided
through U.S. plans representing 85% of our other postretirement benefit obligation, is projected to be 7.5% in
2011 and was estimated as 8% for 2010. Our projections assume that the rate will decrease to 5% by the year
2016 and remain at that level each year thereafter.
The effect of changing the health care cost trend rate by one-percentage point for each future year is as follows:
(in millions)
Effect on total of service and interest cost components . . . . . . . . . . . . . . . . . . . . .
Effect on postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10
107
$ (8)
(91)
One-Percentage
Point Increase
One-Percentage
Point Decrease
Plan Assets
The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the
observability of inputs used in valuation techniques (Level 1, 2 and 3). See Note 15, Fair Value Measurements,
for a discussion of the fair value hierarchy.
117
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The following describes the methods and significant assumptions used to estimate fair value of the investments:
Cash and short-term investments—Valued at cost plus earnings from investments for the period, which
approximates fair market value due to the short-term duration. Cash equivalents are valued at net asset value as
provided by the administrator of the fund.
U.S. Government and agency securities—Valued at the closing price reported on the active market on which the
security is traded or valued by the trustee at year-end using various pricing services of financial institutions,
including Interactive Data Corporation, Standard & Poor’s and Telekurs.
Corporate debt securities—Valued by the trustee at year-end using various pricing services of financial
institutions, including Interactive Data Corporation, Standard & Poor’s and Telekurs.
Common and preferred stock—Valued at the closing price reported on the active market on which the security is
traded.
Collective trusts, Partnerships/joint venture interests and Hedge funds—Valued at the net asset value provided by
the administrator of the fund. The net asset value is based on the value of the underlying assets owned by the
fund, minus its liabilities, and then divided by the number of units outstanding.
The fair value of the pension and other post retirement benefit plan assets by category is summarized below:
Pension Assets
(in millions)
Asset Category
Level 1
Level 2
Level 3
Total
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
190
$ — $
$
Equity
U.S Large Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S Mid Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canadian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Navistar Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Income
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collective Trusts and Other
Common and Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hedge Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Private Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated Insurance Contract
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
482
193
113
202
112
50
—
—
—
—
—
—
—
—
32
—
—
3
1,377
—
—
—
—
—
—
189
309
24
9
284
70
—
—
—
—
—
—
885
$
—
—
—
—
—
—
—
—
—
—
—
—
102
57
—
1
120
—
280
$
190
482
193
113
202
112
50
189
309
24
9
284
70
102
57
32
1
120
3
2,542(A)
$
(A) Excludes $6 million of receivables included in the Change in plan asset table. In addition, the table above includes the fair value of
Canadian pension assets translated at the October 31, 2010 exchange rate while the change in plan asset table includes the fair value of
Canadian pension assets translated at historical foreign currency rates.
118
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The table below presents the changes for those financial instruments classified within Level 3 of the valuation
hierarchy for pension assets for the year ended October 31, 2010:
(in millions)
Balance at November 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases, issuances, and settlements . . . . . . . . . . . . . . . . . . . . . . . .
$
$
140
10
1
(49)
35
11
—
11
$
1
—
—
—
$ 110
10
—
—
Balance at October 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
102
$
57
$
1
$ 120
Hedge
Funds
Private
Equity
Real
Estate
Insurance
Contract
Other Postretirement Benefits
(in millions)
Asset Category
Level 1
Level 2
Level 3
Total
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
43
$ — $
$
Equity
U.S Large Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S Mid Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Navistar Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed Income
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collective Trusts and Other
Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hedge Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Private Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93
46
28
85
12
—
—
—
—
—
—
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
307
$
—
—
—
—
—
88
48
6
4
16
—
—
162
(A) Excludes $1 million of receivables included in the Change in plan asset table.
43
93
46
28
85
12
88
48
6
4
16
25
14
—
—
—
—
—
—
—
—
—
—
25
14
$
39
$
508(A)
The table below presents the changes for those financial instruments classified within Level 3 of the valuation
hierarchy for other postretirement benefit assets for the year ended October 31, 2010:
(in millions)
Balance at November 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases, issuances, and settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hedge
Funds
Private
Equity
$
$
33
2
(10)
9
2
3
Balance at October 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
25
$
14
119
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The Plans’ investment strategy is based on sound investment practices that emphasize long-term investment
fundamentals. The objective of the strategy is to maximize long-term returns consistent with prudent levels of
risk. In establishing the investment strategy of the Plans, the following factors were taken into account: (i) the
time horizon available for investment, (ii) the nature of the Plan’s cash flows and liabilities, and (iii) other factors
that affect the Plan’s risk tolerance.
The strategy is to manage the Plans to achieve fully funded status within the time horizon mandated under
Pension Protection Act of 2006 (“PPA”) after giving effect to the Preservation of Access to Care for Medicare
Beneficiaries and Pension Relief Act of 2010 with a prudent amount of risk. As part of that strategy, the Plans are
invested in a diversified portfolio across a wide variety of asset classes. This includes areas such as large and
small capitalization equities, international and emerging market equities, high quality fixed income, convertible
bonds and alternative assets such as commodities, hedge fund of funds and private equity funds. As a result of
our diversification strategies, we believe we have minimized concentrations of risk within the investment
portfolios.
In line with the Plans’ return objectives and risk parameters, target asset allocations, which were established
following a 2009 asset liability study, are approximately 55% equity investments, 30% fixed income
investments, 10% alternative investments (commodities, hedge funds and private equity), and 5% cash.
All assets are actively managed by external investment managers. Each investment manager is expected to
prudently manage the assets in a manner consistent with the investment objectives, guidelines, and constraints
outlined in the Investment Policy Statement: Managers are not permitted to invest outside of the asset class
mandate (e.g., equity, fixed income, alternatives) or strategy for which they are appointed.
Expected Future Benefit Payments
The expected future benefit payments for the years ending October 31, 2011 through 2015 and the five years
ending October 31, 2020 are estimated as follows:
Pension
Benefit Payments
Other
Postretirement
Benefit Payments(A)
(in millions)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 through 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
326
321
316
310
304
1,422
$
118
118
114
108
101
397
(A) Payments are net of expected participant contributions and expected federal subsidy receipts.
Defined Contribution Plans and Other Contractual Arrangements
Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic
represented employees. The defined contribution plans contain a 401(k) feature and provide most participants
with a matching contribution from the Company. Many participants covered by the plan receive annual Company
contributions to their retirement accounts based on an age-weighted percentage of the participant’s eligible
compensation for the calendar year.
120
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Defined contribution expense pursuant to these plans was $31million, $27 million, and $25 million in 2010,
2009, and 2008, respectively.
In accordance with the 1993 restructured health care and life insurance plans, an independent Retiree
Supplemental Benefit Trust (the “Trust”) was established. The Trust, and the benefits it provides to certain
retirees, is not part of the Company’s consolidated financial statements. The assets of the Trust arise from three
sources: (i) the Company’s 1993 contribution to the Trust of 25.5 million shares of our Class B common stock,
which was subsequently sold by the Trust prior to 2000, (ii) contingent profit-sharing contributions made by the
Company, and (iii) net investment gains on the Trust’s assets, if any.
The Company’s contingent profit sharing obligations will continue until certain funding targets defined by the
1993 Settlement Agreement are met (“Profit Sharing Cessation”). Upon Profit Sharing Cessation, the Company
would assume responsibility for (i) establishing the investment policy for the Trust, (ii) approving or
disapproving of certain additional supplemental benefits to the extent such benefits would result in higher
expenditures than those contemplated upon the Profit Sharing Cessation, and (iii) making additional
contributions to the Trust as necessary to make up for investment and /or actuarial losses.
We have recorded no profit sharing accruals based on the operating performance of the entities that are included
in the determination of qualifying profits.
14. Income taxes
The domestic and foreign components of Income before income tax and extraordinary gain consist of the
following for the years ended October 31:
(in millions)
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax, and extraordinary gain . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
2008
$
$
166
124
290
$
$
441
(82)
359
$
$
302
(111)
191
The components of Income tax expense consist of the following for the years ended October 31:
2010
2009
2008
(in millions)
Current:
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(30) $
4
33
Total current expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7
—
—
16
16
23
$
3
6
14
23
—
—
14
14
37
$
$
9
3
(33)
(21)
(1)
1
78
78
57
121
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
A reconciliation of statutory federal income tax expense to recorded income tax expense is as follows for the
years ended October 31:
(in millions)
Statutory federal income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative minimum tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credits and incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subpart F income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
2008
$
$
101
3
(29)
(2)
(56)
(6)
11
(5)
17
(16)
5
$
126
4
10
(8)
(105)
(11)
13
1
1
(9)
15
67
3
6
(8)
(18)
(13)
(1)
17
4
—
—
Recorded income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
23
$
37
$
57
Our income tax expense on U.S. and Canadian operations is limited to current state income taxes, alternative
minimum tax net of refundable credits, and other discrete items. In 2010, we recognized a U.S. alternative
minimum tax benefit of $29 million as a result of legislation that provides for the refund of alternative minimum
taxes from the carryback of alternative minimum taxable losses to prior years.
Undistributed earnings of foreign subsidiaries were $419 million at October 31, 2010. Domestic income taxes
have not been provided on these undistributed earnings because they are considered to be permanently invested
in foreign subsidiaries. It is not practicable to estimate the amount of unrecognized deferred tax liabilities, if any,
for these undistributed foreign earnings.
The components of the deferred tax asset (liability) at October 31 are as follows:
(in millions)
Deferred tax assets attributable to:
Employee benefits liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss (“NOL”) carry forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product liability and warranty accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carry forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities attributable to:
Goodwill and intangibles assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
$
$
$
$
$
840
306
232
98
115
335
1,107
266
230
124
143
388
1,926
(1,777)
2,258
(2,061)
149
$
197
(104) $
(59)
(97)
(79)
(163) $
(176)
122
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
At October 31, 2010, deferred tax assets attributable to NOL carry forwards include $161 million attributable to
U.S. federal NOL carry forwards, $85 million attributable to foreign NOL carry forwards, and $85 million
attributable to state NOL carry forwards. If not used to reduce future taxable income, U.S. federal NOL tax
benefits are scheduled to expire beginning in 2025.
There is $25 million in our NOL carry forward relating to stock option tax benefits which are deferred until
utilization of our net operating losses. These tax benefits will be allocated to paid in capital when recognized.
Our research and development credits can be carried forward for initial periods of 20 years, state NOLs can be
carried forward for initial periods of 5 to 20 years, and alternative minimum tax credits can be carried forward
indefinitely. We have state NOL carry forwards and research and development credit carry forwards scheduled to
expire in 2011 to 2030. Approximately one half of our foreign net operating losses will expire beginning in 2029,
the balance has no expiration date.
A valuation allowance is required to be established or maintained when, based on currently available information
and other factors, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The
guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset
will be realized, including whether there has been sufficient taxable income in recent years and whether
sufficient taxable income can reasonably be expected in future years in order to utilize the deferred tax asset.
We have assessed the need to establish valuation allowances for deferred tax assets based on determinations of
whether it is more likely than not that deferred tax benefits will be realized through the generation of sufficient
future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in
assessing the need for a valuation allowance. Based on our review of historical operating results and future
income projections and considering the uncertainty of the U.S. economy, we determined that it was more likely
than not that we would not be able to realize the value of our deferred tax assets attributable to U.S. operations
and we therefore continue to maintain valuation allowances against such U.S. assets. If U.S. operations continue
to improve, we believe it is reasonably possible within the next twelve months that the Company may release all
or a portion of its U.S. valuation allowance. We established a full valuation allowance against Canadian deferred
tax assets in 2008. Based on our review of historical operating results and future income projections and
considering the uncertainty of the Canadian economy and our Canadian operations, we determined that it was
more likely than not that we would not be able to realize the value of our deferred tax assets attributable to
Canada and we therefore continue to maintain valuation allowances against such Canadian assets.
We believe that it is more likely than not that the remaining deferred tax assets will be realized. Total deferred
tax valuation allowances decreased by $284 million in 2010 from $2.1 billion to $1.8 billion. In the event we
released all of our valuation allowances, $49 million of tax benefits would be directly allocated to additional paid
in capital, the remainder would impact tax expense.
123
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
As of October 31, 2010 and 2009, the net amount of liability for uncertain tax positions was $91 million and
$139 million ($104 million and $150 million on a gross basis). If these unrecognized tax benefits are recognized,
all but $10 million 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 carry forward, which would be offset by a full valuation
allowance. Changes in the liability for uncertain tax positions during the year ended October 31, 2010 are
summarized as follows:
(in millions)
Liability for uncertain tax positions at October 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase as a result of positions taken in prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease as a result of positions taken in prior periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase as a result of positions taken in the current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
139
7
(14)
5
(46)
Liability for uncertain tax positions at October 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
91
We recognize interest and penalties as part of Income tax expense. Total interest and penalties related to our
uncertain tax positions are immaterial.
We have open tax years from 2001 to 2009 with various significant taxing jurisdictions including the U.S.,
Canada, Mexico, and Brazil. In connection with examinations 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.
15. Fair value measurements
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, accounting guidance for
fair value measurements:
•
•
•
•
defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit
price) in an orderly transaction between market participants at the measurement date, and establishes a
framework for measuring fair value,
establishes a hierarchy of fair value measurements based upon the observability of inputs used to value
assets and liabilities,
requires consideration of nonperformance risk, and
expands disclosures about the methods used to measure fair value.
The guidance establishes a three-level hierarchy of measurements based upon the reliability of observable and
unobservable inputs used to arrive at fair value. Observable inputs are independent market data, while
unobservable inputs reflect our assumptions about valuation. Depending on the inputs, we classify each fair value
measurement as follows:
•
Level 1—based upon quoted prices for identical instruments in active markets,
124
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
•
•
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 a maturity of 90
days or less at the date of purchase, including U.S. Treasury bills, federal agency securities, and commercial
paper, as cash equivalents. We use quoted prices where available and use a matrix of observable market-based
inputs when quoted prices are unavailable.
Marketable Securities. Our marketable securities portfolios are classified as available-for-sale and primarily
include investments in U.S. government and commercial paper with a maturity of greater than 90 days at the date
of purchase. We use quoted prices from active markets to determine their fair values.
Derivative Assets and Liabilities. We measure the fair value of derivatives assuming that the unit of account is an
individual derivative transaction and that 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
readily available 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, or for instruments with notional
amounts that fluctuate over time. Measurements based upon these unobservable assumptions are classified within
Level 3. For more information regarding derivatives, see Note 16, Financial instruments and commodity
contracts.
Retained Interests. We retain certain interests in receivables sold in off-balance sheet securitization
transactions. We estimate the fair value of retained interests using internal valuation models that incorporate
market inputs and our own assumptions about future cash flows. The fair value of retained interests is estimated
based on the present value of monthly collections on the sold finance receivables in excess of amounts accruing
to investors and other obligations arising in securitization transactions. In addition to the amount of debt and
collateral held by the securitization vehicle, the three key inputs that affect the valuation of the retained interests
include credit losses, payment speed, and the discount rate. We classify these assets within Level 3. For more
information regarding retained interest, see Note 6, Finance receivables.
125
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The following table presents the financial instruments measured at fair value on a recurring basis as of
October 31, 2010:
Level 1
Level 2
Level 3
Total
(in millions)
Assets
Marketable securities:
U.S. treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other U.S. and non-U.S. government bonds . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Derivative financial instruments:
Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
159
407
20
—
—
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
586
$
Liabilities
Derivative financial instruments:
Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
$ — $ — $
—
—
2
—
53
159
407
20
2
8
53
$
55
$
649
$ — $
$ — $
4
4
—
—
—
—
8
8
4
4
The following table presents the financial instruments measured at fair value on a recurring basis as of
October 31, 2009:
Level 1
Level 2
Level 3
Total
(in millions)
Assets
Derivative financial instruments:
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate caps purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $
—
—
—
5
—
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
5
$
32
—
1
291
324
Liabilities
Derivative financial instruments:
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate caps sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commodity contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
—
—
30
4
—
$
31
—
1
$
$
$
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
34
$
32
$
32
5
1
291
329
61
4
1
66
126
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The table below presents the changes for those financial instruments classified within Level 3 of the valuation
hierarchy:
2010
2009
Interest
rate swap
assets and
liabilities
Retained
interests
Commodity
contracts
Interest rate
swap assets and
liabilities
Retained
interests
Commodity
contracts
$
1
$
291
$ —
$ —
$
230
$
1
(in millions)
Year Ended October 31
Balance at November 1 . . . . . . . . . . . . .
Total gains (losses) (realized/
unrealized) included in earnings(A)
. .
(1)
4
2
Purchases, issuances and
settlements(B)
. . . . . . . . . . . . . . . . . . .
—
(242)
—
Balance at October 31 . . . . . . . . . .
$ — $
53
$
2
$
1
1
—
5
56
(6)
5
$
291
$ —
(A) For interest rate swap assets and liabilities, gains (losses) are included in Interest expense. For commodity contracts, gains (losses) are
(B)
included in Cost of products sold. For retained interests, gains recognized are included in Finance revenues.
Includes $135 million decrease in retained interests for the year ended October 31, 2010 due to the consolidation of the Master Trust, see
Note 6, Finance Receivables.
The following table presents the financial instruments measured at fair value on a nonrecurring basis as of
October 31:
Level 2
2010
2009
(in millions)
Finance receivables(A)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
27$
48
(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. As of
October 31, 2010, impaired receivables with a carrying amount of $50 million had specific loss reserves of $23 million and a fair value
of $27 million. As of October 31, 2009, impaired receivables with a carrying amount of $84 million had specific loss reserves of $36
million and a fair value of $48 million. 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 used 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 cash equivalents, and accounts payable approximate fair values because of the
short-term maturity and highly liquid nature of these instruments. The carrying amounts of customer receivables
and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables.
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 finance receivables are estimated by discounting
expected cash flows at estimated current market rates. We also use quoted market prices, when available, or the
present value of estimated future cash flows to determine fair values of debt instruments.
127
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The carrying values and estimated fair values of financial instruments as of October 31, 2010 are summarized in
the table below:
(in millions)
Assets
Finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Debt:
Manufacturing operations
Debt of majority-owned dealerships . . . . . . . . . . . . . . . . . . .
8.25% Senior Notes, due 2021 . . . . . . . . . . . . . . . . . . . . . . . .
3.0% Senior Subordinated Convertible Notes,
due 2014(A)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Agreement Related to 6.5% Tax Exempt Bonds,
due 2040 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial services operations
Asset-backed debt issued by consolidated SPEs, at various
October 31, 2010
October 31, 2009
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$
2,465
40
$
2,349
40
$
2,355
16
$
2,177
16
66
965
476
203
225
33
63
1,141
684
197
234
29
148
963
456
261
—
23
145
984
548
244
—
25
rates, due serially through 2018 . . . . . . . . . . . . . . . . . . . . .
974
984
1,227
1,185
Bank revolvers, at fixed and variable rates, due dates from
2012 through 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,731
1,773
1,518
1,470
Revolving retail warehouse facility, at variable rates,
due 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper, at variable rates, due serially through
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings secured by operating and finance leases, at
various rates, due serially through 2017 . . . . . . . . . . . . . . .
—
67
112
—
67
113
500
52
134
489
50
136
(A) The carrying value represents the financials statement amount of the debt after allocation of the conversion feature to equity, while the
fair value is based on quoted market prices for the convertible note which includes the equity feature.
16. 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, to potentially increase the return on invested funds, to
reduce exchange rate risk for transactional exposures denominated in currencies other than the functional
currency and to minimize commodity price volatility. From time to time, we use foreign currency forward and
option contracts to manage the risk of exchange rate movements that would reduce 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. From time to time, we also use
commodity forward contracts to manage variability related to exposure to certain commodity price risk. In
connection with the sale of the Convertible Notes, the Company purchased call options for $125 million. The call
options are intended to minimize share dilution associated with the Convertible Notes. As the call options and
128
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
warrants are indexed to our common stock, we recognized them in permanent equity in Additional paid in
capital, and will not recognize subsequent changes in fair value as long as the instruments remain classified as
equity. For additional information on the purchased call options, see Note 12, Debt. We generally do not enter
into derivative financial instruments for speculative or trading purposes and did not during the years ended
October 31, 2010, 2009, or 2008. None of our derivatives qualified for hedge accounting treatment in 2010,
2009, or 2008.
Certain of our derivative contracts contain provisions that require us to provide collateral only if certain
thresholds are exceeded. No collateral was provided at October 31, 2010 and 2009. Collateral is not required to
be provided by our counter-parties for derivative contracts. 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 agreements. 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 gains
that have been recorded, but have not yet been received in cash. At October 31, 2010 and 2009, our exposure to
credit risk was $10 million and $38 million, respectively.
Our financial services operations manage exposure to fluctuations in interest rates by limiting the amount of
fixed rate assets funded with variable rate debt. This is accomplished by funding fixed rate receivables utilizing a
combination of fixed rate and variable rate debt and derivative financial instruments to convert variable rate debt
to fixed. These derivative financial instruments may include interest rate swaps, interest rate caps, and forward
contracts. The fair value of these instruments is estimated by discounting expected future monthly settlements
and is subject to market risk, as the instruments may become less valuable due to changes in market conditions,
interest rates, or credit spreads of counterparties. Notional amounts of derivative financial instruments do not
represent exposure to credit loss.
The fair values of all derivatives are recorded as assets or liabilities on a gross basis in our Consolidated Balance
Sheets. At October 31, 2010 and 2009, the fair values of our derivatives and their respective balance sheet
locations are presented in the following table:
As of October 31, 2010
(in millions)
Foreign Currency Contracts:
Asset Derivatives
Liability Derivatives
Location in
Consolidated Balance Sheets
Fair Value
Location in
Consolidated Balance Sheets
Fair Value
Current portion . . . . . . . Other current assets
Noncurrent portion . . . . Other noncurrent assets
Commodity contracts . . . . . . Other current assets
$
8 Other current liabilities
— Other noncurrent liabilities
2 Other current liabilities
Total fair value . . . . . . . . . . .
Less: Current portion . . . . . . .
Noncurrent portion . . . . . . . .
10
10
$ —
$ —
—
4
4
4
$ —
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Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Asset Derivatives
Liability Derivatives
Location in
Consolidated Balance Sheets
Fair Value
Location in
Consolidated Balance Sheets
Fair Value
As of October 31, 2009
(in millions)
Interest rate swaps:
Current portion . . . . . . . . Other current assets
Noncurrent portion . . . . . Other noncurrent assets
Interest rate caps purchased . . Other noncurrent assets
Interest rate caps sold . . . . . . . Other noncurrent assets
Commodity contracts . . . . . . . Other current assets
Total fair value . . . . . . . . . . . .
Less: Current portion . . . . . . .
Noncurrent portion . . . . . . . . .
$
$
5 Other current liabilities
27 Other noncurrent liabilities
5 Other noncurrent liabilities
— Other noncurrent liabilities
1 Other current liabilities
38
(6)
32
$
$
9
52
—
4
1
66
(10)
56
The location and amount of gain (loss) recognized in income on derivatives are as follows for the years ended
October 31:
Location in
Consolidated Statements of Operations
Amount of Gain
(Loss) Recognized
Interest expense
Interest expense
Interest expense
Other (income) expenses, net
Costs of products sold
2010
2009
2008
$
(5) $
(3)
3
8
1
(44) $
2
(1)
5
(6)
(57)
1
(1)
—
1
$
4
$
(44) $
(56)
(in millions)
Interest rate swaps . . . . . . . . . . . . . . . . . . .
Interest rate caps purchased . . . . . . . . . . . .
Interest rate caps sold . . . . . . . . . . . . . . . . .
Foreign currency contracts . . . . . . . . . . . . .
Commodity forward contracts . . . . . . . . . .
Total gain (loss) . . . . . . . . . . . . . . . . . . . . .
Interest Rate Swaps and Caps
In September 2008, we entered into two floating-to-floating interest rate swaps (“basis swaps”) to economically
hedge a portion of the floating interest rate associated with our $1.5 billion five-year term loan facility and
synthetic revolving facility. The basis swaps had an aggregate notional amount of $1.1 billion and became
effective October 30, 2008. The basis swaps matured on January 30, 2009. For the year ended October 31, 2009,
we recognized a loss of $2 million under these arrangements.
In June 2005, TRIP entered into a $500 million revolving facility that matured and was paid in June 2010. Under
the terms of this agreement, TRIP purchases and holds fixed rate retail notes and finance leases from NFC. TRIP
finances such purchases with its revolving facility. TRIP purchased interest caps with a notional amount of $500
million to protect it against the potential of rising commercial paper interest rates. To offset the economic cost of
these caps, NFC sold identical interest rate caps. As of October 31, 2010, there were no interest rate caps
outstanding.
NFC previously entered into various interest rate swap agreements in connection with the sale of retail notes and
lease receivables. The purpose and structure of these swaps is to convert the floating rate portion of the asset-
backed securities into fixed rate swap interest to match the interest basis of the receivables pool sold to the owner
trust in those periods, and to protect NFC from interest rate volatility. As of October 31, 2009, the aggregate
notional amount of the outstanding interest rate swaps was $3.4 billion. As of October 31, 2010, there were no
interest rate swaps outstanding.
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Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Foreign Currency Contracts
In 2010, we entered into forward exchange contracts as economic hedges of anticipated cash flows denominated
in Canadian dollars, Indian rupees, and Euros. In 2009, we also entered into forward exchange contracts as
economic hedges of anticipated cash flows denominated in Indian rupees and South African rand. All of these
contracts were entered into to protect against the risk that the eventual cash flows resulting from such
transactions will be adversely affected by changes in exchange rates between the U.S. dollar and the respective
foreign currency. In 2009, we entered into put option contracts for Canadian dollars as economic hedges of
anticipated cash flows denominated in Canadian dollars to also protect the revenue of certain contracts
denominated in Canadian dollars. The put option contracts for Canadian dollars had staggered maturity dates, and
the final contract matured in June 2010. As of October 31, 2010, we had outstanding forward exchange contracts
with notional amounts of €49 million Euros and C$24 million Canadian dollars and maturity dates ranging from
January 2011 to May 2011.
Commodity Forward Contracts
In 2010, we entered into commodity forward contracts as economic hedges of exposure to variability of
commodity prices for diesel fuel, lead, and steel. These contracts were entered into to protect against the risk that
the eventual cash flows related to purchases of the commodities will be adversely affected by future changes in
prices. As of October 31, 2010, we had outstanding diesel fuel contracts with aggregate notional values of $21
million, outstanding lead contracts with aggregate notional values of $1 million, and outstanding steel contracts
with aggregate notional values of $80 million. As of October 31, 2009, we had outstanding diesel fuel
commodity forward contracts with aggregate notional amounts of $2 million and outstanding steel contracts with
aggregate notional amounts of $39 million. The commodity forward contracts have several maturity dates
ranging from February 2011 to October 2011.
17. 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 the guidance on
guarantor’s accounting and disclosure requirements for guarantees including indirect guarantees of the
indebtedness of others. 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.
For certain retail customer sales and leases financed by third parties, we are contingently liable for the residual
values and share in credit losses. In addition, for certain independent dealers’ wholesale inventory financed by
third party banks or finance companies we provide repurchase agreements to the respective financing institution.
The amount of losses related to these arrangements has not been material to our Consolidated Statement of
Operations and the value of the guarantees and accruals recorded are not material to our Consolidated Balance
Sheet.
We also have issued residual value guarantees in connection with various leases financed by our financing
operations. The amounts of the guarantees are estimated and recorded as liabilities as of October 31, 2010. Our
guarantees are contingent upon the fair value of the leased assets at the end of the lease term. The amount of
losses related to these arrangements has not been material to our Consolidated Statement of Operations and the
value of the guarantees and accruals recorded are not material to our Consolidated Balance Sheet.
131
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
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. The amount of
available stand-by letters of credit and surety bonds were $47 million at October 31, 2010.
We extend credit commitments to certain truck fleet customers, which allow them to purchase parts and services
from participating dealers. The participating dealers receive accelerated payments from us with the result that we
carry the receivables and absorb the credit risk related to these customers. At October 31, 2010, we have
$28 million of unused credit commitments outstanding under this program.
In addition, as of October 31, 2010, we have entered into various purchase commitments of $106 million and
contracts that have cancellation fees of $29 million with various expiration dates through 2017.
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.
The terms of the Ford Settlement require us to indemnify Ford with respect to intellectual property infringement
claims, if any, that are brought against Ford or others that use the 6.0 liter or 6.4 liter engines on behalf of Ford.
The maximum amount of future payments that we could potentially be required to pay under the indemnification
would depend upon whether any such claims are alleged in the future and thus cannot currently be determined.
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, 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.
Four sites formerly owned by us, (i) Solar Turbines in San Diego, California, (ii) the West Pullman Plant in
Chicago, Illinois, (iii) the Canton Plant in Canton, Illinois, and (iv) Wisconsin Steel in Chicago, Illinois, were
identified as having soil and groundwater contamination. Two sites in Sao Paulo, Brazil, one where we are
currently operating and another where we previously had operations, were identified as having soil and
groundwater contamination. On October 14, 2010, the Illinois EPA issued a No Further Remediation letter for
West Pullman Plant, signifying that all appropriate remediation work at the site has been completed. While
investigations and cleanup activities continue at all other sites, we believe that we have adequate accruals to
cover costs to complete the cleanup of these sites.
We have accrued $21 million for these and other environmental matters that may arise, which are included within
Other current liabilities and Other noncurrent liabilities, as of October 31, 2010. The majority of these accrued
liabilities are expected to be paid subsequent to 2012.
132
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Along with other vehicle manufacturers, we have been subject to an increase in the 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 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 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.
Litigation Relating to Accounting Controls and Financial Restatement
In December 2007, a complaint was filed against us by Norfolk County Retirement System and Brockton
Contributory Retirement System (collectively “Norfolk”), which was subsequently amended in May 2008. In
March 2008, an additional complaint was filed by Richard Garza, which was subsequently amended in October
2009. Both of these matters were filed in the United States District Court, Northern District of Illinois.
The plaintiffs in the Norfolk case allege they are shareholders suing on behalf of themselves and a class of other
shareholders who purchased shares of the Company’s common stock between February 14, 2003 and July 17,
2006. The amended complaint alleges that the defendants, which include the Company, one of its executive
officers, two of its former executive officers, and the Company’s former independent accountants, Deloitte &
Touche LLP (“Deloitte”), violated federal securities laws by making false and misleading statements about the
Company’s financial condition during that period. In March 2008, the court appointed Norfolk County
Retirement System and the Plumbers Local Union 519 Pension Trust as joint lead plaintiffs. On July 7, 2008, the
Company filed a motion to dismiss the amended complaint based on the plaintiffs’ failure to plead any facts
tending to show the defendants’ actual knowledge of the alleged false statements or that the plaintiffs suffered
damages. Deloitte also filed a motion to dismiss on similar grounds. On July 28, 2009, the Court granted
Deloitte’s motion to dismiss but denied the motion to dismiss as to all other defendants. The parties then engaged
in discovery focused on class certification issues. As reported to the Court on November 4, 2010, the parties have
entered into a tentative settlement to resolve the matter. Pursuant to the proposed settlement, the Company has
agreed to cause $13 million to be paid to a settlement fund and, in return, plaintiffs would dismiss the lawsuit
with prejudice and provide a release of all claims that relate in any manner to the allegations, facts or any other
matter whatsoever set forth in or otherwise related, directly or indirectly to the allegations in the
complaint. The proposed settlement agreement will also contain, among other provisions, a statement that each of
the defendants has denied and continues to deny having committed or intended to commit any violations of law
133
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
or any wrongdoing whatsoever, that each of the defendants does not make any admission of liability, and that
defendants are entering into the settlement solely because it would eliminate the burden, risk and expense of
further litigation and would fully and finally resolve all of the claims released by plaintiffs. Before the
settlement becomes final, the proposed settlement must be finally approved by the Court. The Company also
reached an agreement with the insurer under its directors’ and officers’ insurance policy that includes a provision
for the insurer to reimburse the Company for settlement costs attributable to the defendant directors and officers.
The plaintiff in the Garza case brought a derivative claim on behalf of the Company against one of the
Company’s executive officers, two of its former executive officers, and certain of its directors, alleging that all of
the defendants violated their fiduciary obligations under Delaware law by willfully ignoring certain accounting
and financial reporting problems at the Company, thereby knowingly disseminating false and misleading
financial information about the Company and certain of the defendants were unjustly enriched in connection with
their sale of Company stock during the December 2002 to January 2006 period. On November 30, 2009, the
defendants filed a motion to dismiss the amended complaint based on plaintiff’s failure to state a claim and based
on plaintiff’s failure to make a demand on the Board of Directors. On August 20, 2010, the Court entered an
order granting defendants’ motion to dismiss the amended complaint based on plaintiff’s failure to make a
demand on the Board of Directors. On August 26, 2010, the Company received from plaintiff a letter demanding
that the Board of Directors investigate the matters alleged in the plaintiff’s amended complaint. After plaintiff
advised the Court that he did not intend to seek leave to file a second amended complaint, the Court entered final
judgment of dismissal on September 15, 2010. In December 2010, a preliminary settlement agreement was
reached with plaintiff whereby plaintiff agreed to withdraw his demand in consideration for an immaterial
amount.
SEC Investigation
In January 2005, we announced that we would restate our financial results for 2002 and 2003 and the first three
quarters of 2004. Our restated Annual Report on Form 10-K was filed in February 2005. The SEC notified us on
February 9, 2005 that it was conducting an informal inquiry into our restatement. On March 17, 2005, we were
advised by the SEC that the status of the inquiry had been changed to a formal investigation. On April 7, 2006,
we announced that we would restate our financial results for 2002 through 2004 and for the first three quarters of
2005. We were subsequently informed by the SEC that it was expanding the investigation to include this
restatement. Our 2005 Annual Report on Form 10-K, which included the restated financial statements, was filed
in December 2007.
On August 5, 2010, the SEC announced that a final administrative settlement had been reached concluding the
SEC’s investigation of this matter. Under the administrative settlement in each case without admitting or denying
wrongdoing, we consented to a cease and desist order requiring future compliance with certain reporting, books
and records, and internal accounting control provisions of the federal securities laws and our chief executive
officer consented to a cease and desist order requiring future compliance with an internal accounting control
provision of the federal securities laws and agreed to return to us a portion of his bonus for 2004. The order does
not require the Company to pay a monetary penalty. The SEC states in the order that in determining to accept the
settlement and not impose a monetary penalty against us, it considered our remedial acts and the cooperation we
afforded the investigative staff of the SEC.
Commercial Steam LLC and Andrew Harold vs. Ford Motor Co. and Navistar International Corporation.
In October 2009, Commercial Steam LLC and Andrew Harold (collectively, the “plaintiffs”) served the
Company with an amended complaint naming the Company as a defendant in a case in the United States District
Court for the Southern District of West Virginia. The plaintiffs in this case alleged they are suing on behalf of
themselves and a putative class of other West Virginia residents who purchased a model year 2003 to 2006 Ford
134
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
F-Series truck with a 6.0 liter Power Stroke engine. The amended complaint alleged problems with these vehicles
and engines, including, but not limited to, the fuel system, fuel injectors, oil leaks, broken turbochargers, and
other warranty claims. The plaintiffs in this matter sought compensatory damages, interest and attorneys’ fees
among other relief. On November 10, 2009, we answered the amended complaint and strongly disputed the
allegations contained in the amended complaint.
In April 2010, counsel for plaintiffs filed a notice with the Court stating that plaintiffs would not proceed with
moving for class certification. As a result, plaintiffs no longer asserted claims on behalf of a putative class
previously alleged to include thousands of potential members, but asserted only their individual
claims. Plaintiffs’ counsel subsequently agreed to dismiss the pending individual claims against the Company
without prejudice. On May 27, 2010, the parties filed a joint motion to dismiss the claims asserted against the
Company. On May 28, 2010, the Court granted the parties’ joint motion seeking that relief, and dismissed the
claims asserted against the Company.
Retiree Health Care Litigation
In April 2010, the UAW and others (“Plaintiffs”) filed a “Motion of Plaintiffs Art Shy, UAW, et al for an
Injunction to Compel Compliance with the Settlement Agreement” (the “Shy Motion”). The Shy Motion is
pending in U.S. District Court for the Southern District of Ohio (the “Court”). The Shy Motion seeks to enjoin
the Company from implementing an administrative change relating to prescription drug benefits under a
healthcare plan for Medicare eligible retirees (the “Part D Change”). Specifically, Plaintiffs claim that the Part D
Change violates the terms of a June 1993 settlement agreement previously approved by the Court (the
“Settlement Agreement”). That Settlement Agreement resolved a class action originally filed in 1992 regarding
the restructuring of the Company’s then applicable retiree health care and life insurance benefits.
The Part D Change was effective July 1, 2010, and made the Company’s prescription drug coverage for post-65
retirees (“Plan 2” or Medicare-eligible retirees) supplemental to the coverage provided by Medicare. Plan 2
retirees now pay the premiums for Medicare Part D drug coverage. For drugs that are covered by Medicare
Part D, Plan 2 supplements that coverage through a “buy down” of co-payments to the amounts in place prior to
the Part D Change.
In May 2010, the Company filed its Opposition to the Shy Motion (the “Opposition”).
In June 2010, Navistar filed a separate Complaint in the Court relating to the Settlement Agreement (the
“Complaint”). In the Complaint, the Company argues that it has not received the consideration that it was
promised in the Settlement Agreement—specifically, that the Company’s APBO for health benefits would be
“permanently reduced” to approximately $1 billion. The Company, therefore, seeks a declaration from the Court
that it is not required to fund or provide retiree health benefits that would cause its APBO to exceed the
approximate $1 billion amount provided in the Settlement Agreement.
FATMA Notice
International Indústria de Motores da América do Sul Ltda. (“IIAA”) formerly known as Maxion International
Motores S/A (“Maxion”), a wholly owned subsidiary of the Company, received a notice on July 15, 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 US$1.2 million at
135
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
October 31, 2010), 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 on August 3, 2010 and
has not yet received a decision following that appearance. IIAA disputes the allegations in the notice and intends
to vigorously defend itself.
6.0 Liter Diesel Engine Litigation
In November 2010, Brandon Burns filed a putative class action lawsuit against Navistar, Inc. and Ford Motor Co.
(“Ford”) in federal court for the Southern District of California (the “Burns Action”). The Burns Action seeks to
certify a class of California owners and lessees of model year 2003-07 Ford vehicles powered by the 6.0L Power
Stroke® engine that Navistar, Inc. previously supplied to Ford. Burns alleges that the engines in question have
design and manufacturing defects. The theories of liability asserted against Navistar are negligent performance of
contractual duty (related to Navistar’s former contract with Ford), unfair competition, and unjust enrichment. For
relief, the Burns Action seeks dollar damages sufficient to remedy the alleged defects, compensate the alleged
damages incurred by the proposed class, and compensate plaintiffs’ counsel. The Burns Action also asks the
Court to award punitive damages and restitution/disgorgement.
Since the filing of the Burns Action, four additional putative class action lawsuits have been filed in federal
courts by the same plaintiff’s attorney representing Mr. Burns in the Burns Action (the “Additional Actions”).
The Additional Actions seek to certify in Utah, Arkansas, Tennessee, and Mississippi, classes similar to the
proposed California class in the Burns Action. Navistar has not yet been served in the Mississippi case, but has
obtained a copy of the complaint. The theories of liability and relief sought in the Additional Actions are
substantially similar to the Burns Action.
We have also been made aware of the Kruse Technology Partnership vs. Ford Motor Company, lawsuit filed
against Ford regarding potential patent infringement of three patents in the United States District Court for the
Central District of California. An amended complaint against Ford was filed by Kruse in August 2010. The
amended complaint alleges that Ford has infringed the patents by sale or use of engines, such as the Power Stroke
diesel engines. The general subject matter of the patents is pilot injection of fuel in the combustion
cycle. Navistar formerly supplied Power Stroke diesel engines to Ford, although today Ford manufactures its own
Power Stroke engines. In the Ford Navistar Settlement Agreement of January 9, 2009, Navistar agreed to
indemnify Ford for claims of infringement based upon Ford’s manufacture, sale or use of the 6.0 and 6.4 liter
Power Stroke engines sold by Navistar to Ford. Ford has not requested Navistar to defend Ford at this time.
Lis Franco de Toledo, et. al. vs. Syntex do Brasil and MWM
In 1973, Syntex do Brasil Industria e Comercio Ltda. (“Syntex”), a predecessor of our Brazilian engine
manufacturing subsidiary now known as MWM International Industria de Motores da America do Sul Ltda
(“MWM”), filed a lawsuit against Dr. Lis Franco de Toledo and others (collectively, “Lis Franco”). Syntex
claimed Lis Franco had improperly terminated a contract which provided for the transfer from Lis Franco to
Syntex of a patent for the production of a certain vaccine. Lis Franco filed a counterclaim, alleging that he was
entitled to royalties under the contract. In 1975, the Brazilian trial court ruled in favor of Lis Franco, a decision
which was affirmed on appeal in 1976. In 1984, while the case was still pending, Syntex’ owner, Syntex
Comercio e Participacoes Ltds (“Syntex Parent”) sold the stock of Syntex to the entity now known as MWM, and
in connection with that sale Syntex Parent agreed to indemnify and hold harmless MWM for any and all
liabilities of Syntex, including its prior pharmaceutical operations (which had been previously spun-off to
another subsidiary wholly-owned by the Syntex parent) and any payments that might be payable under the Lis
Franco lawsuit. In the mid to late 1990s, Syntex Parent was merged with an entity now known as Wyeth
Industrica Farmaceutica Ltds (“Wyeth”).
136
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
In 1999, Lis Franco amended its pleadings to add MWM to the lawsuit as a defendant. In 2000, Wyeth
acknowledged to the Brazilian court its sole responsibility for amounts due in the Lis Franco lawsuit and MWM
asked the court to be dismissed from that action. The judge denied that request. MWM appealed and lost.
In his pleadings, Lis Franco alleges that the royalties payable to him were approximately R$42 million. MWM
believed the appropriate amount payable is approximately R$16 million. In December 2009, the court appointed
expert responsible for the preparation of the royalty calculation filed a report with the court indicating royalty
damages of R$68 million. MWM challenged the expert’s calculation. In August 2010, the court asked the parties
to consider the appointment of a new expert. MWM agreed with this request but Lis Franco objected and, in
December 2010, the court accepted and ratified the expert’s calculation as of May 30, 2010 in the amount of
R$74 million (the equivalent of approximately US$43.5 million at October 31, 2010) and entered judgment
against MWM. We believe this calculation is incorrect and intend to appeal the decision. In May 2010,
MWM filed a lawsuit against Wyeth, seeking recognition that Wyeth is liable for any and all liabilities, costs,
expenses and payments related to the Lis Franco lawsuit.
18. Segment reporting
The following is a description of our four reporting segments:
•
•
•
•
Our Truck segment manufactures and distributes a full line of Class 4 through 8 trucks, buses and military
vehicles under the International and IC Bus, LLC (“IC”) brands. Our Truck segment also produces chassis
for motor homes and commercial step-van vehicles under the WCC brand and recreational vehicles under
the Monaco family of brands. 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 Engine segment designs and manufactures diesel engines for use primarily in our Class 6 and 7 medium
trucks and buses and Class 8 heavy truck models, and for sale to OEMs primarily in North America. In
addition, we produce diesel engines in Brazil primarily for distribution in South America under the MWM
brand for sale to OEMs. We had an agreement with Ford to be its exclusive supplier of V-8 diesel engines
for all of its diesel-powered super-duty trucks and vans over 8,500 lbs gross vehicle weight in North
America, which expired on December 31, 2009. Also included in the Engine segment are the operating
results of BDP, which manages the sourcing, merchandising, and distribution of service parts for vehicles
we and Ford sell in North America.
Our Parts segment provides customers with proprietary products needed to support the International
commercial and military truck, IC bus, WCC chassis, and the MaxxForce® engine lines. Our Parts segment
also provides a wide selection of other standard truck, trailer, and engine service parts. At October 31, 2010,
this segment operated eleven regional parts distribution centers that provide 24-hour availability and
shipment.
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. Our Mexican financial services operations’ primary
business is to provide wholesale, retail, and lease financing to dealers and retail customers in the Mexican
market.
Corporate contains those items that do not fit into our four segments.
137
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Segment Profit (Loss)
We define segment profit (loss) as net income (loss) attributable to Navistar International Corporation excluding
income tax expense. Additional information about segment profit (loss) is as follows:
•
•
•
•
•
The UAW master contract and non-represented employee profit sharing, annual incentive compensation,
and the costs of contingent contributions to the Supplemental Trust are included in corporate expenses, if
applicable.
Interest expense and interest income for the manufacturing operations are reported in corporate expenses.
Certain sales to our dealers include interest-free periods that vary in length. The Financial Services segment
finances these sales and our Truck segment subsidizes and reimburses the Financial Services segment for
those finance charges.
Intersegment purchases and sales between the Truck and Engine segments are recorded at our best estimates
of arms-length pricings. The MaxxForce Big-Bore engine program is being treated as a joint program with
the Truck and Engine segments sharing in certain costs of the program.
Intersegment purchases from the Truck and Engine segments by the Parts segment are recorded at standard
production cost.
• We allocate “access fees” to the Parts segment from the Truck and Engine segments for certain engineering
and product development costs, depreciation expense, and selling, general and administrative expenses
incurred by the Truck and Engine segments based on the relative percentage of certain sales, as adjusted for
cyclicality.
•
•
•
Certain sales financed by the Financial Services segment, primarily NFC, require the manufacturing
operations, primarily the Truck segment, and the Financial Services segment to share a portion of customer
losses or the manufacturing operations may be required to repurchase the repossessed collateral from the
Financial Services segment at the principal value of the receivable.
Beginning in 2010, our Financial Services segment began charging the Truck and Parts segments a 3.0% fee
for incremental borrowing costs related to NFC’s new bank credit facility. This fee is based on the monthly
outstanding balance of the new bank credit facility that relates specifically to the Truck and Parts segments
and totaled $14 million in 2010.
Other than the items discussed above, the selected financial information presented below is recognized in
accordance with our policies described in Note 1, Summary of significant accounting policies.
138
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Selected financial information as of and for the years ended October 31 is as follows:
Truck
Engine(A)
Parts
Financial
Services(B)
Corporate
and
Eliminations
Total
(in millions)
October 31, 2010
External sales and revenues, net . . . . . .
Intersegment sales and revenues . . . . . .
Total sales and revenues, net . . . . . . . . .
Depreciation and amortization . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . .
Equity in (loss) income of
non-consolidated affiliates . . . . . . . .
Net income attributable to NIC . . . . . . .
Income tax expense . . . . . . . . . . . . . . . .
Segment profit (loss) . . . . . . . . . . . . . . .
Segment assets . . . . . . . . . . . . . . . . . . . .
Capital expenditures(C) . . . . . . . . . . . . . .
October 31, 2009
External sales and revenues, net . . . . . .
Intersegment sales and revenues . . . . . .
Total sales and revenues, net . . . . . . . . .
Depreciation and amortization . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . .
Equity in (loss) income of
non-consolidated affiliates . . . . . . . .
Net income attributable to NIC . . . . . . .
Income tax expense . . . . . . . . . . . . . . . .
Segment profit (loss) . . . . . . . . . . . . . . .
Segment assets . . . . . . . . . . . . . . . . . . . .
Capital expenditures(C) . . . . . . . . . . . . . .
October 31, 2008
External sales and revenues, net . . . . . .
Intersegment sales and revenues . . . . . .
Total sales and revenues, net . . . . . . . . .
Depreciation and amortization . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . .
Equity in (loss) income of
non-consolidated affiliates . . . . . . . .
Net income attributable to NIC . . . . . . .
Income tax expense . . . . . . . . . . . . . . . .
Segment profit (loss) . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
$
$
8,205
2
8,207
160
—
(51)
424
—
424
2,457
82
7,294
3
7,297
178
—
(5)
147
—
147
2,660
65
10,314
3
10,317
183
—
(14)
805
—
805
$
$
$
$
$
$
$
$
$
$
$
$
2,031
955
2,986
106
—
(2)
51
—
51
1,715
116
2,031
659
2,690
118
—
45
253
—
253
1,517
56
2,499
758
3,257
161
—
$
$
$
$
$
$
$
$
$
$
$
80
(366)
—
(366) $
Segment assets . . . . . . . . . . . . . . . . . . . .
Capital expenditures(C) . . . . . . . . . . . . . .
2,796
84
1,374
76
$
$
$
$
$
$
$
$
$
$
$
$
1,690
195
1,885
7
—
3
266
—
266
811
8
1,975
198
2,173
7
—
6
436
—
436
664
13
1,586
238
1,824
7
—
5
254
—
254
711
6
219
90
309
28
113
—
95
—
95
3,497
2
269
79
348
25
161
—
40
—
40
4,136
3
325
80
405
22
313
$
$
$
$
$
$
$
$
$
$
$
— $
(1,242)
(1,242) $
12,145
—
12,145
$
15
140
—
(613)
23
(590) $
316
253
(50)
223
23
246
1,250
26
9,730
234
— $
(939)
(939) $
11,569
—
11,569
$
16
90
—
(556)
37
(519) $
1,051
14
— $
(1,079)
(1,079)
20
156
$
$
344
251
46
320
37
357
10,028
151
14,724
—
14,724
393
469
71
134
57
191
—
(24)
—
(24) $
—
(535)
57
(478) $
4,879
8
630
2
10,390
176
(A) See Note 2, Ford settlement and related charges, for further discussion.
(B) Total sales and revenues in the Financial Services segment include interest revenues of $270 million, $304 million, and $386 million for
2010, 2009, and 2008, respectively.
(C) Exclusive of purchases of equipment leased to others.
139
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Following is information about one customer from which we derived more than 10% of our consolidated Sales
and revenues, net:
•
Sales of vehicles and service parts to the U.S. government were 15%, 25%, and 27% of consolidated sales
and revenues for 2010, 2009, and 2008, respectively. Sales of vehicles and service parts to the U.S.
government are reported in our Truck and Parts segments.
Information concerning principal geographic areas for the years ended October 31, 2010, 2009, and 2008 is as
follows:
2010
2009
2008
(in millions)
Sales and revenues:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brazil
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets:(A)
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brazil
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
8,728
1,006
609
961
841
1,338
126
87
476
1
$
$
9,262
748
467
638
454
1,344
164
72
466
3
(A) Long-lived assets consist of Property and equipment, net, Goodwill, and Intangible assets, net.
$
10,796
949
959
936
1,084
19. Stockholders’ deficit
Preferred and Preference Stocks
NIC has authorized 30 million shares of preferred stock, none of which have been issued, with a par value of
$1.00 per share. NIC also has authorized 10 million shares of preference stock with a par value of $1.00 per
share.
The UAW holds the Series B Nonconvertible Junior Preference Stock (“Series B”) and is currently entitled to
elect one member of our Board of Directors. As of October 31, 2010 and 2009, there was one share of Series B
Preference stock authorized and outstanding.
As of October 31, 2010 and 2009, there were 140,162 and 148,926 shares, respectively, of Series D Convertible
Junior Preference Stock (“Series D”) issued and outstanding. These shares were issued with a par value of $1.00
per share, an optional redemption price, and a liquidation preference of $25 per share plus accrued dividends.
The Series D stock may be converted into NIC common stock at the holder’s option (subject to adjustment in
certain circumstances); upon conversion each share of Series D stock is converted to 0.3125 shares of common
stock. The Series D stock ranks senior to common stock as to dividends and liquidation and receives dividends at
a rate of 120% of the cash dividends on common stock as declared on an as-converted basis.
In July 2007, the Company filed a Certificate of Designation to its Restated Certificate of Incorporation creating
a series of 110,000 shares of Preferred Stock designated as Junior Participating Preferred Stock, Series A, par
value $1.00 per share. The Junior Participating Preferred Stock, Series A are entitled to dividends and shall have
the voting and such other rights as provided for in the Certificate of Designation.
140
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
Common Stock
NIC has authorized 110 million shares of common stock with a par value of $0.10 per share. There were
71.8 million shares and 70.7 million shares of common stock outstanding, net of common stock held in treasury,
at October 31, 2010 and 2009, respectively.
Loans to officers and directors are recorded as reductions of additional paid-in capital. These loans accrue
interest at the applicable federal rate (as determined by Section 1274(d) of the Internal Revenue Code) on the
common stock purchase dates for loans of stated maturity. The loans are unsecured and interest is compounded
annually over a nine-year term. Principal and interest are due at maturity and a loan may be prepaid at any time at
the participant’s option. Loans to officers and directors, which were made primarily to finance the purchase of
shares of NIC common stock, were less than $1 million at October 31, 2010 and 2009. Effective July 31, 2002,
we no longer offer such loans. All amounts due under these loans are deemed fully collectible.
Additional Paid in Capital
In connection with the sale of the Convertible Notes, the Company purchased call options for $125 million and
entered into separate warrant transactions whereby, the Company sold warrants for $87 million to purchase
shares of common stock. As the call options and warrants are indexed to our common stock, we recognized them
in permanent equity in Additional paid in capital, and will not recognize subsequent changes in fair value as long
as the instruments remain classified as equity. See Note 12, Debt, for further discussion.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following as of October 31:
(in millions)
Postretirement and other postemployment benefits . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2010
2009
2008
(1,316) $ (1,788) $ (958)
1
120
98
(1,196) $
(1,690) $
(957)
Dividend Restrictions
Under the General Corporation Law of the State of Delaware, dividends may only be paid out of surplus or out of
net profits for the year in which the dividend is declared or the preceding year, and no dividend may be paid on
common stock at any time during which the capital of outstanding preferred stock or preference stock exceeds
our net assets.
As set forth in the Senior Indenture, the terms of our Senior Notes include various financial covenants and
restrictions including, among others, certain limitations on dividends. The Loan Agreement with regard to the
Tax Exempt Bonds contains substantially identical financial covenants and restrictions, including among others,
certain limitations on dividends. We have not paid dividends on our common stock since 1980.
Share Repurchase Program
In July 2008, our Board of Directors authorized a $36 million share repurchase program, which expired in July
2009. Under this program, we repurchased 1,000,000 shares of our common stock at an average price of $28.89.
141
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
In December 2010, our Board of Directors authorized a share repurchase program utilizing cash proceeds
received from the exercise of stock options, up to a limit of $25 million, which expires in December 2011.
20. Earnings per share
The following table shows the information used in the calculation of our basic and diluted earnings per share as
of October 31:
2010
2009
2008
(in millions, except per share data)
Numerator:
Income attributable to Navistar International Corporation before extraordinary
gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
223
—
297
23
$
134
—
Net income attributable to Navistar International Corporation available to
common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
223
$
320
$
134
Denominator:
Weighted average shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71.7
1.5
73.2
71.0
0.8
71.8
70.7
2.5
73.2
Basic earnings per share:
Income attributable to Navistar International Corporation before extraordinary
gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.11
—
$ 4.18
0.33
$ 1.89
—
Net income attributable to Navistar International Corporation . . . . . . . . . . . . . . . . .
$ 3.11
$ 4.51
$ 1.89
Diluted earnings per share:
Income attributable to Navistar International Corporation before extraordinary
gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.05
—
$ 4.14
0.32
$ 1.82
—
Net income attributable to Navistar International Corporation . . . . . . . . . . . . . . . . .
$ 3.05
$ 4.46
$ 1.82
The aggregate shares not included in the computation of diluted earnings per share, as they would be anti-
dilutive, were 11.5 million in 2010, 22.9 million in 2009, and an immaterial amount in 2008, respectively. The
11.5 million shares not included in the 2010 computation include the 11.4 million shares for warrants to purchase
common stock related to our Convertible Notes. In connection with the sale of the Convertible Notes, we entered
into separate warrant transactions whereby we sold warrants to various counterparties to purchase from us an
aggregate 11.4 million shares of our common stock, subject to adjustments, at an exercise price of $60.14 per
share of common stock. The shares were not included as they are anti-dilutive as our average stock price was less
than the strike price on the warrants for the fiscal year ended October 31, 2010.
21. Stock-based compensation plans
We have various stock-based compensation plans, approved by the Compensation Committee of the Board of
Directors, which provide for granting of stock options to employees and directors for purchase of our common
stock at the fair market value of the stock on the date of grant. The grants generally have a 10-year contractual
142
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
life. Starting with the December 2009 grants, the Company granted awards with a 7-year contractual life. Below
is a brief description of the material features of each plan.
From March 1, 2006 and continuing through September 11, 2008, we had been subject to the blackout trading
rules of Regulation BTR of the SEC, which generally prohibit our directors and executive officers from engaging
in any transaction involving Company stock where participants in an individual account plan (such as a
401(k) plan) are temporarily prohibited from engaging in transactions in the Company’s stock in their Company-
sponsored individual account plan. We were subject to Regulation BTR because of the delay in filing our 2007
financial results and inability to continue to offer our common stock as an investment option under our
401(k) plans.
Redeemable Equity Securities. Our options contained provisions allowing for a cash settlement in the event of a
change in control and when certain other conditions existed. Accordingly, the intrinsic value of these options was
reflected as mezzanine equity. In the first quarter of 2009, we modified the terms of certain outstanding stock
options classified as mezzanine equity. The modification, which required the consent of plan participants,
eliminated the feature that allowed for cash settlement in the event of a change in control when certain other
conditions existed. As a result, the value of the modified award is no longer required to be presented as
mezzanine equity under the guidance on the classification and measurement of redeemable securities. The
modification resulted in a reduction of $130 million of Redeemable equity securities and a corresponding
increase to Additional paid in capital in 2009. As additional plan participants consent to the modification,
exercise their stock option, or they expire, additional amounts will be reclassified from Redeemable equity
securities to Additional paid in capital.
2004 Performance Incentive Plan. Our 2004 Performance Incentive Plan (“2004 Plan”) was approved by our
Board of Directors and subsequently by our stockholders on February 17, 2004. We subsequently amended the
2004 Plan from time to time. The 2004 Plan replaced, on a prospective basis, our 1994 Performance Incentive
Plan and 1998 Supplemental Stock Plan, both of which expired December 16, 2003, and our 1998
Non-Employee Director Stock Option Plan (the “Prior Plans”). No new grants are being made under the Prior
Plans and any awards previously granted under the Prior Plans are exercisable in accordance with their original
terms and conditions. In addition, after February 17, 2004, restoration stock options have been or may be granted
under the 2004 Plan. Prior to February 17, 2004, restoration stock options were granted under our 1998
Supplemental Stock Plan (a non-stockholder approved plan), as supplemented by the Restoration Stock Option
Program (as more fully described below). In December 2008, the 2004 Plan was further amended to remove the
restoration feature for future grants and to comply with certain 409A tax safe harbor regulations. Stock options
awarded under the 2004 Plan generally have a term of not more than 10 years and become exercisable as to
one-third of the shares on each of the first three anniversaries of the date of grant so that in three years the shares
are 100% vested. Awards of restricted stock and restricted stock units granted under the 2004 Plan, as well as
other award grants, are established by our Board of Directors or committee thereof at the time of issuance. A
total of 3,250,000 shares of common stock were originally reserved for awards under the 2004 Plan. In February
2010, an additional award of 2,500,000 was approved by the shareholders that increased the total shares of
common stock reserved for awards under the 2004 Plan to 5,750,000. Shares subject to awards under the 2004
Plan, or any other Prior Plans after February 17, 2004, that are cancelled, expired, forfeited, settled in cash,
tendered to satisfy the purchase price of an award, withheld to satisfy tax obligations or otherwise terminated
without a delivery of shares to the participant become available for future awards. As of October 31, 2010,
3,658,068 awards remain available for shares of common stock reserved for issuance under the 2004 Plan.
1994 Performance Incentive Plan. Our 1994 Performance Incentive Plan (“1994 Plan”) was approved by our
Board of Directors and subsequently by our stockholders on March 16, 1994. For each year during the term of
143
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
the 1994 Plan, one percent of the outstanding shares of our common stock as of the end of the immediately
preceding year were reserved for issuance. Shares not issued in a year carried over to the subsequent year.
Forfeited and lapsed shares could be reissued. Stock options awarded under the 1994 Plan generally have a term
of not more than 10 years and become exercisable as to one-third of the shares on each of the first three
anniversaries of the date of grant so that in three years the shares are 100% vested. As of October 31, 2010,
940,179 awards remain outstanding for shares of common stock reserved for issuance under the 1994 Plan. Our
1994 Plan expired on December 16, 2003.
The following plans were approved by our Board of Directors but were not approved and were not required to be
approved by our stockholders: the 1998 Supplemental Stock Plan as supplemented by the Restoration Stock
Option Program (the “Supplemental Plan”), the Executive Stock Ownership Program (the “Ownership
Program”), the 1998 Non-Employee Director Stock Option Plan (the “Director Stock Option Plan”), and the
Non-Employee Directors Deferred Fee Plan (the “Deferred Fee Plan”).
Supplemental Plan. The Supplemental Plan was approved by our Board of Directors on December 15, 1998. A
total of 4,500,000 shares of common stock were reserved for awards under the Supplemental Plan. Shares subject
to awards under the Supplemental Plan, or any other Plans prior to February 17, 2004, that were cancelled,
expired, forfeited, settled in cash, or otherwise terminated without a delivery of shares to the participant of the
plan, including shares used to pay the option exercise price of an option issued under the Plan or any other plan
or to pay taxes with respect to such an option again became available for awards. The Supplemental Plan is
separate from and intended to supplement the 1994 Plan. Stock options awarded under the Supplemental Plan
generally have a term of not more than 10 years and become exercisable as to one-third of the shares on each of
the first three anniversaries of the date of grant so that in three years the shares are 100% vested. Awards of
restricted stock granted under the Supplemental Plan were established by our Board of Directors or committee
thereof at the time of issuance. In addition, prior to February 17, 2004, the Restoration Stock Option Program
supplemented the Supplemental Plan. Under the program, generally an option holder may exercise vested options
by presenting shares that have been held for at least six months and have a total market value equal to the option
price times the number of options. Restoration options are then granted at the market price in an amount equal to
the number of mature shares that were used to exercise the original option, plus the number of shares that are
withheld for the required tax liability. Participants who own non-qualified stock options that were vested prior to
December 31, 2004, may also defer the receipt of shares of NIC common stock due in connection with a
restoration stock option exercise of these options. Participants who elect to defer receipt of these shares will
receive deferred stock units. The deferral feature is not available for non-qualified stock options that vest on or
after January 1, 2005. As of October 31, 2010, 1,275,045 awards remain outstanding for shares of common stock
reserved for issuance under the Supplemental Plan. The Supplemental Plan expired December 16, 2003.
Ownership Program. On June 16, 1997, our Board of Directors approved the terms of the Ownership Program,
and has since amended it from time to time. In general, the Ownership Program requires all officers and senior
managers to acquire, by direct purchase or through salary or annual bonus reduction, an ownership interest in the
Company by acquiring a designated amount of our common stock at specified timelines. Participants are required
to hold such stock for the entire period in which they are employed by the Company. Participants may defer their
cash bonus into deferred share units (“DSUs”). The DSUs vest immediately. There are 9,342 DSUs (which
include 3,607 DSUs granted under the 2004 Plan after February 17, 2004) outstanding as of October 31, 2010.
Premium share units (“PSUs”) may also be awarded to participants who complete their ownership requirement
on an accelerated basis. PSUs vest as to one-third of the shares on each of the first three anniversaries of the date
of grant, so that in three years the shares are 100% vested. There were 63,750 PSUs (which includes 22,962
PSUs granted under the 2004 Plan after February 17, 2004) outstanding as of October 31, 2010. Each vested
DSU and PSU will be settled by delivery of one share of common stock. Such settlement will occur within
144
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
10 days after a participant’s termination of employment or at such later date as required by Internal Revenue
Code Section Rule 409A. After February 17, 2004, PSU’s and DSU’s awarded under this program are issued
under the 2004 Plan.
Director Stock Option Plan. The Director Stock Option Plan provides for an annual option grant to each
non-employee director of the Company to purchase 4,000 shares of our common stock. The option exercise price
in each case was 100% of the fair market value of our common stock on the business day following the day of
grant. Stock options awarded under the Director Stock Option Plan generally became exercisable in whole or in
part after the commencement of the second year of the term of the option for which the term was 10 years. The
optionee was also required to remain in the service of the Company for at least one year from the date of grant.
The Director Stock Option Plan was terminated on February 17, 2004. Grants made to non-employee directors
after February 17, 2004 are issued under the 2004 Plan. As of October 31, 2010, 40,500 awards remain
outstanding for shares of common stock reserved for issuance under the Director Stock Option Plans.
Deferred Fee Plan. Under the Deferred Fee Plan, non-employee directors may elect to defer payment of all or a
portion of their retainer fees and meeting fees in cash (with interest) or in stock units. Deferrals in the deferred
stock account are valued as if each deferral was vested in NIC common stock as of the deferral date. As of
October 31, 2010, 39,372 deferred shares remain outstanding for shares of common stock reserved for issuance
under the Deferred Fee Plan.
The following summarizes stock option activity for the years ended October 31:
2010
2009
2008
(shares in thousands)
Options outstanding, at beginning of year . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/expired . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Exercise
Price
$
33.09
38.71
30.94
38.14
Shares
5,917
599
(1,147)
(458)
Shares
5,589
951
(456)
(167)
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
$
$
34.60
22.66
30.29
31.81
7,143
—
(1,366)
(188)
34.64
—
35.14
32.27
34.60
Options outstanding, at end of year . . . . . . . . . . . . .
4,911
33.81
5,917
33.09
5,589
Options exercisable, at end of year
. . . . . . . . . . . . .
3,767
$
34.67
5,023
$
34.95
5,589
$
34.60
Options available for grant, at end of year . . . . . . . .
3,380
938
The following table summarizes information about stock options outstanding at October 31, 2010:
Options Outstanding
Range of Exercise Prices
$ 21.22 – $ 31.81 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32.18 – $ 41.53 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 42.48 – $ 57.38 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Remaining
Contractual
Life
(in years)
5.0
3.7
2.9
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
(in millions)
$
24.87
38.69
43.85
$
49
17
5
Number
Outstanding
(in thousands)
2,119
1,761
1,031
145
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
The following table summarizes information about stock options exercisable at October 31, 2010:
Options Exercisable
Range of Exercise Prices
$ 21.22 – $ 31.81 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32.18 – $ 41.53 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 42.48 – $ 57.38 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Remaining
Contractual
Life
(in years)
3.9
2.8
3.1
Weighted
Average
Exercise
Price
$25.65
39.73
43.03
Aggregate
Intrinsic
Value
(in millions)
$35
11
5
Number
Outstanding
(in thousands)
1,567
1,292
908
The weighted average fair value at date of grant for options granted during the year ended October 31, 2010 was
$18.00 and was estimated using the Black-Scholes option-pricing model with the following weighted average
assumptions:
2.72%
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — %
52.60%
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.5
Expected life in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
The use of the Black-Scholes option-pricing model requires us to make certain estimates and assumptions. The
risk-free interest rate utilized is the implied yield on U.S. Treasury zero-coupon issues with a remaining term
equal to the expected term assumption on the grant date, rounded to the nearest half year. A dividend yield
assumption of 0% is used for all grants based on the Company’s history of not paying a dividend to any class of
stock. The expected volatility for each individual grant is based on the historical adjusted closing prices over a
period of time commensurate with the expected term of the option, ending on the date of grant, including as
appropriate recent trends in historical volatility and the market implied volatility of the share price based on
publicly traded instruments. For options granted in December 2009, we used the history from November 1, 1999
to the beginning of that year to determine the expected life for all grants during that year. The weighted average
expected life in years for all grants as a group is then calculated for each year. We monitor share option exercise
and employee termination patterns to estimate forfeiture rates.
Compensation expense related to stock options was $9 million and $5 million in 2010 and 2009, respectively. As
of October 31, 2010, unrecognized compensation expense related to outstanding unvested options approximated
$5 million, and we expect to recognize this cost over a weighted average period of 1.6 years. The intrinsic value
of stock options exercised in 2010 was $20 million.
In April 2008, the Board of Directors approved the 2008 Emergence Long-Term Incentive Grant, under the 2004
Plan, to certain employees, consultants, and non-employee directors to primarily replace equity-based
compensation forgone during the blackout period, described above. The grant was for share-settled restricted
stock units (RSUs) that vest 25% on the first anniversary of the grant date, 25% on the second anniversary, and
50% on the third anniversary. A grant of 542,670 shares, with a fair value of $60.86 per share, was made in the
fourth quarter of 2008 to approximately 270 participants following the expiration of the blackout period.
Compensation expense related to these awards was approximately $6 million and $7 million in 2010 and 2009,
respectively. The remaining share-based compensation expense expected to be recognized in connection with
these awards is approximately $5 million, which will generally be recognized on a straight-line basis over the
remaining vesting period of the individual awards. We expect to recognize this cost over a weighted average
period of 0.9 years. As of October 31, 2010, 234,147 shares were vested and 61,961 shares were forfeited.
146
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
In December 2008, a grant of 191,739 share-settled RSUs, with a fair value of $22.66 per share, was made under
the 2004 Plan. In December 2009, an additional 89,760 share-settled RSUs were granted with a fair value of
$35.80 per share under the 2004 Plan. The grants vest as to one-third of the shares on each anniversary date of
the grant so that in three years the units are 100% vested. Compensation expense related to these awards was
approximately $3 million in 2010. The remaining share-based compensation expense expected to be recognized
in connection with these awards is approximately $2 million which will generally be recognized on a straight-line
basis over the remaining vesting period of the individual awards. We expect to recognize this cost over a
weighted average period of 1.6 years.
In December 2009, a grant of 284,480 cash-settled RSUs was made under the 2004 Plan. Similar with-share
settled RSUs, the grants vest as to one-third of the shares on each anniversary date so that in three year the units
are 100% vested. The cash-settled RSUs will be settled in cash and as such are classified as liability the fair value
being remeasured based on the Company’s stock at each reporting date through settlement. The fair value of this
grant was $35.80 per share as of grant date and $48.18 per share as of October 31, 2010. Compensation expense
related to these awards was approximately $6 million in 2010. The remaining compensation expense expected to
be recognized in connection with these awards is approximately $6 million which will generally be recognized
on a straight-line basis over the remaining vesting period of the individual awards. We expect to recognize this
cost over a weighted average period of 2.0 years. As of October 31, 2010, no shares vested and 7,640 shares were
forfeited.
In connection with the 2004 Plan, from time to time we award shares of restricted stock to key executives. These
shares are issued upon such terms and conditions as approved by the Board or Compensation Committee thereof
and typically are contingent on continued service to the Company for a specified period of time (the “vesting
period”). During any vesting period, the restricted shares are not transferable, although the executives may have
some of the rights of a shareholder, including the rights to vote and to receive dividends. Except in the event of
death, disability, or retirement, if the executives fail to satisfy the vesting conditions (such as by terminating
employment prior to completion of the vesting period) they forfeit their right to the unvested shares. At
October 31, 2010, there were 10,000 restricted stock awards outstanding and unvested. We valued these awards
as of their issuance date and are recognizing their cost over the requisite service period of these executives. The
share-based compensation expense for these awards in 2010 was less than $1 million. The remaining share-based
compensation expense to be recognized in connection with these awards in the future is immaterial.
The Company received cash of $30 million and $13 million during 2010 and 2009, respectively, related to stock
awards exercised and did not use cash to settle stock awards. The Company realized a tax benefit from stock
awards exercised during 2008 of $1 million, but did not realize any tax benefit for 2010 or 2009.
147
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
22. Supplemental cash flow information
The following table provides additional information about the Company’s Consolidated Statements of Cash
Flows for the years ended October 31, 2010, 2009, and 2008:
(in millions)
Equity in income of affiliated companies, net of dividends
Equity in (income) loss of non-consolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . .
Dividends from non-consolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 50
5
$ (46) $ (71)
85
59
Equity in loss/income of affiliated companies, net of dividends . . . . . . . . . . . . . . . .
$ 55
$ 13
$ 14
Other non-cash operating activities
For the Years Ended
October 31,
2010
2009
2008
Loss (gain) on sales of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain on acquisition of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Gain on increased equity interest in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Loss on sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale and impairment of repossessed collateral . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of debt issuance cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
9
39
4
$
8
$
1
$
(4)
(23) —
(23) —
1
8
28
32
48
24
11 —
Other non-cash operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 61
$ 54
$ 49
Changes in other assets and liabilities
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (39) $ (34) $ 33
103
—
(7)
(10)
(180)
(85)
(362)
97
37
(102)
3
(8)
7
(73)
(40)
(16)
1
Changes in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(160) $(142) $(373)
Cash paid during the year
Interest, net of amounts capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 170
27
$ 211
(5)
$ 399
73
Non-cash investing and financing activities
Property and equipment acquired under capital leases . . . . . . . . . . . . . . . . . . . . . . . .
Transfers from inventories to property and equipment for leases to others . . . . . . . .
12
34
6
32
3
39
23. Condensed consolidating guarantor and non-guarantor financial information
The following tables set forth condensed consolidating balance sheets as of October 31, 2010 and 2009, and
condensed consolidating statements of operations and condensed consolidating statements of cash flows for the
years ended October 31, 2010, 2009, and 2008. The information is presented as a result of Navistar, Inc.’s
guarantee, exclusive of its subsidiaries, of NIC’s indebtedness under its Senior Notes due 2021 and obligations
related to the Tax Exempt Bonds due 2040. Navistar, Inc. is a direct wholly-owned subsidiary of NIC. None of
NIC’s other subsidiaries guarantee any of these notes. The guarantee is full and unconditional. Separate financial
statements and other disclosures concerning Navistar, Inc. have not been presented because management believes
148
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
that such information is not material to investors. Within this disclosure only, “NIC” includes the consolidated
financial results of the parent company only, with all of its wholly-owned subsidiaries accounted for under the
equity method. Likewise, “Navistar, Inc.,” 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. and its U.S. subsidiaries. Navistar, Inc. has a tax allocation agreement (“Tax Agreement”)
with NIC which requires Navistar, Inc. 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. 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., to utilize current
U.S. taxable losses of Navistar, Inc. and all other direct or indirect subsidiaries of NIC.
We have revised our previously reported condensed consolidating balance sheet as of October 31, 2009 to reflect
the correction of errors in those statements and the effect of the adoption of new accounting guidance related to
the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial
cash settlement) and the accounting for non-controlling interests. The 2009 and 2008 impact of these errors,
totaling $10 million, was recognized in our 2010 condensed consolidating statements of operations as they were
not material to our financial results for 2009 and 2008. The revisions did not impact the condensed consolidating
statement of cash flows for the years ended October 31, 2009 and 2008. See Note 1, Summary of significant
accounting policies, for further discussion.
NIC
Navistar,
Inc.
Non-Guarantor
Subsidiaries
Eliminations
and Other
Consolidated
(in millions)
Condensed Consolidating Statement of
Operations for the year Ended October 31,
2010
Sales and revenues, net . . . . . . . . . . . . . . . . . . .
$ — $
6,751
$
11,278
$
(5,884) $
12,145
Costs of products sold . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . .
All other operating expenses (income) . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . .
Equity in (loss) income of affiliates . . . . . . . . . .
Income (loss) before income tax . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Income tax benefit (expense)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to non-controlling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to controlling
(1)
—
61
60
283
223
—
223
—
6,303
(13)
1,349
7,639
895
7
55
62
—
9,245
(2)
763
10,006
(17)
1,255
(78)
1,177
(5,806)
—
(94)
(5,900)
(1,211)
(1,195)
—
(1,195)
44
—
9,741
(15)
2,079
11,805
(50)
290
(23)
267
44
interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
223
$
62
$
1,133
$
(1,195) $
223
149
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
NIC
Navistar,
Inc.
Non-Guarantor
Subsidiaries
Eliminations
and Other
Consolidated
(in millions)
Condensed Consolidating Balance Sheet as
of October 31, 2010
Assets
Cash and cash equivalents . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents . . . . . . .
Finance and other receivables, net . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . .
Investments in non-consolidated affiliates . . .
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
239
375
20
9
—
—
—
(3,006)
1
266
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,096) $
22
—
9
222
644
—
443
5,290
1
118
6,749
$
324
211
151
3,730
974
324
1,003
60
146
467
$
— $
—
—
(15)
(50)
—
(4)
(2,241)
(2)
(1)
$
7,390
$
(2,313) $
585
586
180
3,946
1,568
324
1,442
103
146
850
9,730
Liabilities, redeemable equity securities,
and stockholders’ equity (deficit)
Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits liabilities . . . . . . . . . .
Amounts due to (from) affiliates . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . .
Redeemable equity securities . . . . . . . . . . .
Stockholders’ equity attributable to
$
$
$
1,666
—
(5,058)
2,269
(1,123)
8
213
1,907
8,111
112
10,343
—
$
3,220
272
(3,140)
1,369
1,721
—
non-controlling interests . . . . . . . . . . . . .
—
—
49
(229) $
—
87
(145)
(287)
—
—
4,870
2,179
—
3,605
10,654
8
49
Stockholders’ equity (deficit) attributable
to Navistar International
Corporation . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities, redeemable equity
securities, and stockholders’ equity
(deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(981)
(3,594)
5,620
(2,026)
(981)
$ (2,096) $
6,749
$
7,390
$
(2,313) $
9,730
150
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
NIC
Navistar,
Inc.
Non-Guarantor
Subsidiaries
Eliminations
and Other
Consolidated
(in millions)
Condensed Consolidating Statement of Cash
Flows for the Year Ended October 31, 2010
Net cash provided by (used in) operations . . . . . .
Cash flow from investment activities
Net change in restricted cash and cash
$(174)
$(421)
$ 1,041
$ 661
$ 1,107
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Net sales of marketable securities . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . —
Other investing activities . . . . . . . . . . . . . . . . . . . . .
(20)
—
(374) —
(107)
(84)
515
(212)
(172)
(13)
Net cash provided by (used in) investment
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(394)
(191)
118
—
—
—
33
33
515
(586)
(279)
(84)
(434)
Cash flow from financing activities
Net borrowings (repayments) of debt . . . . . . . . . . . .
Other financing activities . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing
(20)
35
598
—
(1,195)
(24)
(661)
(33)
(1,278)
(22)
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
598
(1,219)
(694)
(1,300)
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
—
Cash and cash equivalents
Decrease during the period . . . . . . . . . . . . . . . . . . . .
At beginning of the period . . . . . . . . . . . . . . . . . . . .
(553)
792
(14)
36
—
(60)
384
—
—
—
—
(627)
1,212
Cash and cash equivalents at end of the period . . . .
$ 239
$ 22
$
324
$ —
$
585
151
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
NIC
Navistar,
Inc.
Non-Guarantor
Subsidiaries
Eliminations
and Other
Consolidated
(in millions)
Condensed Consolidating Statement of
Operations for the Year Ended October 31,
2009
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . .
$— $6,210
$11,013
$(5,654)
$11,569
Costs of products sold . . . . . . . . . . . . . . . . . . . . . . . .
6
Impairment of property and equipment . . . . . . . . . . . —
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . —
All other operating expenses (income) . . . . . . . . . . .
(7)
Total costs and expenses . . . . . . . . . . . . . . . . . . . . .
Equity in income (loss) of affiliates . . . . . . . . . . . . . .
Income (loss) before income tax and extraordinary
gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . .
(1)
320
321
(1)
5,859
(1)
59
1,139
7,056
983
137
48
$320
Income (loss) before extraordinary gain . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . —
$ 185
—
Net Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to non-controlling
320
185
9,139
32
—
778
9,949
51
1,115
(84)
$ 1,031
23
1,054
(5,638)
—
—
(110)
(5,748)
(1,308)
(1,214)
—
$(1,214)
—
(1,214)
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
—
25
—
9,366
31
59
1,800
11,256
46
$
359
(37)
322
23
345
25
Net income (loss) attributable to controlling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$320
$ 185
$ 1,029
$(1,214)
$
320
152
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
NIC
Navistar,
Inc.
Non-Guarantor
Subsidiaries
Eliminations
and Other
Consolidated
(in millions)
Condensed Consolidating Balance Sheet as of
October 31, 2009 (Revised)(A)
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents . . . . . . . . . . .
Finance and other receivables, net . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Property and equipment, net
. . . . . . . . . . . . . . . . .
Investments in non-consolidated affiliates . . . . . .
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
792
21
4
—
—
—
(3,809)
—
39
36
10
131
766
—
432
4,306
29
107
$
384
454
4,134
942
318
1,036
53
134
426
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2,953) $ 5,817
$ 7,881
Liabilities, redeemable equity securities and
stockholders’ equity (deficit)
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits liabilities . . . . . . . . . . . . .
Amounts due to (from) affiliates . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable equity securities . . . . . . . . . . . . . . .
Stockholders’ equity attributable to
$ 1,434
—
(4,343)
1,691
(1,218)
13
$
268
2,462
7,046
200
9,976
—
$ 3,819
231
(2,623)
1,930
3,357
—
$ —
—
(184)
(42)
—
(1)
(488)
1
(3)
$(717)
$(229)
—
(80)
(104)
(413)
—
$ 1,212
485
4,085
1,666
318
1,467
62
164
569
$10,028
$ 5,292
2,693
—
3,717
11,702
13
non-controlling interest . . . . . . . . . . . . . . . . . .
—
—
61
—
61
Stockholders’ equity (deficit) attributable to
Navistar International Corporation . . . . . . . .
(1,748)
(4,159)
4,463
(304)
(1,748)
Total liabilities, redeemable equity securities
and stockholders’ equity (deficit) . . . . . . . . . .
$(2,953) $ 5,817
$ 7,881
$(717)
$10,028
(A) Revised; See Note 1, Summary of significant accounting policies.
153
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
(in millions)
Condensed Consolidating Statement of Cash
Flows for the Year Ended October 31, 2009
Net cash provided by (used in) operations . . . . . . .
Cash flow from investment activities
Net change in restricted cash and cash
NIC
Navistar,
Inc.
Non-Guarantor
Subsidiaries
Eliminations
and Other
Consolidated
$165
$ (55)
$ 894
$ 234
$1,238
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales of marketable securities . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other investing activities . . . . . . . . . . . . . . . . . . . . . . —
(19)
1
(4)
—
(46)
(71)
94
1
(151)
(78)
Net cash provided by (used in) investment
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(18)
(121)
(134)
—
—
—
61
61
Cash flow from financing activities
Net borrowings (repayments) of debt
. . . . . . . . . . . .
Other financing activities . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing
166
185
(53) —
(807)
40
(234)
(61)
71
2
(197)
(88)
(212)
(690)
(74)
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113
185
(767)
(295)
(764)
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
—
Cash and cash equivalents
Increase (decrease) during the year . . . . . . . . . . . . . .
Increase in cash and cash equivalents upon
260
consolidation of BDP and BDT . . . . . . . . . . . . . . . —
532
. . . . . . . . . . . . . . . . . . . . . .
At beginning of the year
9
—
27
9
2
80
302
—
—
—
—
9
271
80
861
Cash and cash equivalents at end of the year . . . .
$792
$ 36
$ 384
$ —
$1,212
NIC
Navistar,
Inc.
Non-Guarantor
Subsidiaries
Eliminations
and Other
Consolidated
(in millions)
Condensed Consolidating Statement of
Operations for the Year Ended October 31,
2008
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . .
$— $7,909
$13,524
$(6,709)
$14,724
Costs of products sold . . . . . . . . . . . . . . . . . . . . . . . . —
Impairment of property and equipment . . . . . . . . . . . —
All other operating expenses (income) . . . . . . . . . . .
(74)
Total costs and expenses . . . . . . . . . . . . . . . . . . . . .
Equity in income (loss) of affiliates . . . . . . . . . . . . . .
Income (loss) before income tax . . . . . . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . .
Net income (loss)
Less: Net income attributable to non-controlling
. . . . . . . . . . . . . . . . . . . . . . . . . . .
(74)
61
135
(1)
7,159
274
1,517
8,950
997
(44)
(4)
11,367
84
967
12,418
68
1,174
(47)
(6,584)
—
(106)
(6,690)
(1,055)
(1,074)
(5)
11,942
358
2,304
14,604
71
191
(57)
$134
$ (48)
$ 1,127
$(1,079)
$
134
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
—
—
—
—
Net income (loss) attributable to controlling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$134
$ (48)
$ 1,127
$(1,079)
$
134
154
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
NIC
Navistar,
Inc.
Non-Guarantor
Subsidiaries
Eliminations
and Other
Consolidated
(in millions)
Condensed Consolidating Statement of Cash
Flows for the Year Ended October 31, 2008
Net cash provided by (used in) operations . . . . . . .
Cash flow from investment activities
Net change in restricted cash and cash
$104
$(349)
$ 986
$ 379
$1,120
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales of marketable securities . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . —
Other investing activities . . . . . . . . . . . . . . . . . . . . . .
1
3
3
6
—
(26)
(58)
(150)
1
(192)
4
Net cash provided by (used in) investment
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
(78)
(337)
—
—
3
72
75
Cash flow from financing activities
Net borrowings (repayments) of debt
Other financing activities . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . —
30
Net cash provided by (used in) financing
407
—
(631)
(28)
(481)
27
(143)
4
(215)
21
(333)
(705)
29
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
407
(659)
(454)
(676)
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
—
Cash and cash equivalents
Increase (decrease) during the year . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
At beginning of the year
141
391
(20)
47
(27)
(37)
339
—
—
—
(27)
84
777
Cash and cash equivalents at end of the year . . . .
$532
$ 27
$ 302
$ —
$ 861
24. Selected quarterly financial data (Unaudited)
Quarterly Condensed Consolidated Statements of Operations and Financial Data
1st Quarter Ended
January 31,
2nd Quarter Ended
April 30,
2010
2009
2010
2009
(in millions, except per share data and percentages)
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing gross margin(A)(B)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to non-controlling interests . . . . . . . . . . . . . . .
$2,809
496
30
13
$2,970
572
234
—
$2,743
501
43
13
$2,808
446
12
—
Net income attributable to Navistar International Corporation(B) . . . . . . . . . .
$
17
$ 234
$
30
$
12
Basic earnings per share attributable to Navistar International
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.24
$ 3.28
$ 0.43
$ 0.16
Diluted earnings per share attributable to Navistar International
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.23
3.27
0.42
0.16
Market price range-common stock
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41.52
31.53
33.34
15.24
52.43
36.79
38.10
22.25
155
Navistar International Corporation
Notes to Consolidated Financial Statements (Continued)
(in millions, except per share data and percentages)
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing gross margin(A)(B)
Impairment of property and equipment . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before extraordinary gain(B)
. . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Net income (loss)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to non-controlling interests . . . . . . .
Net income (loss) attributable to Navistar International
3rd Quarter Ended
July 31,
4th Quarter Ended
October 31,
2010
2009
2010(C)
2009
$
3,221
637
—
149
—
149
12
$
2,506
314
—
(28)
23
(5)
7
3,372
551
—
45
—
45
6
$
3,285
602
31
104
—
104
18
Corporation(B)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
137
$
(12) $
39
$
86
Basic earnings (loss) per share :
Income (loss) attributable to Navistar International
Corporation before extraordinary gain . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.89
—
(0.49) $
0.33
$
0.55
—
1.21
—
Net income (loss) attributable to Navistar International
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.89
$
(0.16) $
0.55
$
1.21
Diluted earnings (loss) per share:
Income (loss) attributable to Navistar International
Corporation before extraordinary gain . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to Navistar International
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market price range-common stock
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
1.83
—
1.83
58.00
44.00
(0.49) $
0.33
0.54
—
(0.16) $
0.54
48.94
35.84
$
53.83
40.58
$
$
$
1.19
—
1.19
48.26
31.71
(A) Manufacturing gross margin is calculated by subtracting Costs of products sold from Sales of manufactured products, net.
(B) We record adjustments to our product warranty accrual to reflect changes in our estimate of warranty costs for products sold in prior
(C)
periods. Such adjustments typically occur when claims experience deviates from historic and expected trends.
In the fourth quarter of 2010, we recorded out-of-period adjustments of $10 million. See Note 1, Summary of significant accounting
policies, for more information.
156
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are
designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act
is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and
that such information is accumulated and communicated to management, including the Chief Executive Officer
and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
Management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures as of October 31, 2010. Based on the evaluation, management has concluded that the disclosure
controls and procedures were effective as of October 31, 2010.
(b) Changes in Internal Control over Financial Reporting
There were no material changes in our internal control over financial reporting identified in connection with the
evaluation required by Rules 13a-15 and 15d-15 that occurred during the quarter ended October 31, 2010 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
(c) Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a
process designed by, and under the supervision of, our Chief Executive Officer and Chief Financial Officer and
effected by management and our Board of Directors to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
GAAP. Internal control over financial reporting includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of assets of the Company.
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. GAAP and that receipts and expenditures of the Company are being
made in accordance with authorization of our management and our Board of Directors.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all
misstatements. Also, projections of any evaluation of the effectiveness of our internal control over financial
reporting to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the internal control over financial reporting as of
October 31, 2010 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control—Integrated Framework. As a result of that evaluation, management
concluded that our internal control over financial reporting was effective as of October 31, 2010.
157
Our independent registered public accounting firm, KPMG LLP, has audited the Company’s consolidated
financial statements and the effectiveness of the Company’s internal control over financial reporting as of
October 31, 2010. Their report appears in this Annual Report on Form 10-K.
Item 9B. Other Information
None.
158
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
A list of our executive officers and biographical information appears in Part I, Item 1 of this report. Information
about our directors, and additional information about our executive officers, may be found under the caption
“Proposal 1—Election of Directors” in our Proxy Statement for the Annual Meeting of Stockholders to be held
February 15, 2011 (the “Proxy Statement”). Information about our Audit Committee may be found under the
caption “Board Committees and Meetings” and “Audit Committee Report” in the Proxy Statement. That
information is incorporated herein by reference.
The information in the Proxy Statement set forth under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” and “Code of Conduct” is incorporated herein by reference.
Item 11. Executive Compensation
The information in the Proxy Statement set forth under the caption “Compensation” is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information in the Proxy Statement set forth under the captions “Persons Owning More Than Five Percent of
Navistar Common Stock,” “Navistar Common Stock Owned by Executive Officers and Directors,” and “Equity
Compensation Plan Information” is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth in the Proxy Statement under the captions “Related Party Transactions and Approval
Policy” and “Director Independence Determinations” is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information concerning principal accountant fees and services appears in the Proxy Statement under the heading
“Independent Registered Public Accounting Firm Fee Information” and is incorporated herein by reference.
159
PART IV
Item 15. Exhibits and Financial Statement Schedules
Financial Statements
See Item 8—Financial Statements and Supplementary Data
Financial statement schedules are omitted because of the absence of the conditions under which they are
required or because information called for is shown in the consolidated financial statements and notes thereto.
Page
E-1
E-2
E-3
Exhibit:
(3)*
(4)*
(10)*
(11)
Articles of Incorporation and By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Instruments Defining the Rights of Security Holders, Including Indentures . . . . . . . . . . . . .
Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computation of Earnings per Share (incorporated by reference from Note 20, Earnings per
share, to the accompanying consolidated financial statements) . . . . . . . . . . . . . . . . . . . . .
142
Computation of Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-20
(12)*
Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-21
(21)*
Consent of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . E-22
(23.1)*
Consent of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . E-23
(23.2)*
Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-24
(24)*
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 . . . . . . . . . . E-25
(31.1)*
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 . . . . . . . . . . E-26
(31.2)*
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . . . . . . . . . . E-27
(32.1)*
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . . . . . . . . . . E-28
(32.2)*
Additional Financial Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-29
(99.1)
Additional Financial Information (Audited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-37
(99.2)*
Additional Financial Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-46
(99.3)*
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
(101.INS)** XBRL Instance Document
(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
. . . . . . . . . . . . . . . . . . . . . . . . N/A
(101.DEF)** XBRL Taxonomy Extension Definition Linkbase Document
*
Indicates exhibits not included within this 2010 Annual Report to Shareholders. These exhibits were included within our Annual Report
on Form 10-K for the year ended October 31, 2010, which was filed with the SEC on December 21, 2010.
** Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of
Section 18 of the Exchange Act and otherwise are not subject to liability under those sections.
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 Annual Report on Form 10-K for the year ended October 31, 2010.
160
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of Section 13 or 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/ RICHARD C. TARAPCHAK
Richard Tarapchak
Vice President and Controller
(Principal Accounting Officer)
December 21, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ DANIEL C. USTIAN
Daniel C. Ustian
/s/ ANDREW J. CEDEROTH
Andrew J. Cederoth
/s/ RICHARD C. TARAPCHAK
Richard Tarapchak
/s/ EUGENIO CLARIOND
Eugenio Clariond
/s/
JOHN D. CORRENTI
John D. Correnti
/s/ DIANE H. GULYAS
Diane H. Gulyas
/s/ MICHAEL N. HAMMES
Michael N. Hammes
/s/ DAVID D. HARRISON
David D. Harrison
/s/
JAMES H. KEYES
James H. Keyes
/s/ STEVEN J. KLINGER
Steven J. Klinger
/s/ WILLIAM H. OSBORNE
William H. Osborne
/s/ DENNIS D. WILLIAMS
Dennis D. Williams
Chairman, President and
Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer)
Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
161
December 21, 2010
December 21, 2010
December 21, 2010
December 21, 2010
December 21, 2010
December 21, 2010
December 21, 2010
December 21, 2010
December 21, 2010
December 21, 2010
December 21, 2010
December 21, 2010
[THIS PAGE INTENTIONALLY LEFT BLANK]
EXHIBIT 99.1
Additional Financial Information (Unaudited)
The following additional financial information is provided based upon the continuing interest of certain
stockholders and creditors to assist them in understanding our core manufacturing business with our financial
services operations on a pre-tax equity basis. Our manufacturing operations, for this purpose, include our Truck
segment, Engine segment, Parts segment, and Corporate items. The manufacturing operations financial
information represents non-GAAP financial measures. The reconciling differences between these non-GAAP
financial measures and our GAAP consolidated financial statements in Item 8 are our financial services
operations, which are included on a pre-tax equity basis. Certain of our subsidiaries in our manufacturing
operations have debt outstanding with our financial services operations (“intercompany debt”). In the condensed
statements of assets, liabilities and stockholders’ deficit, the intercompany debt is reflected as accounts payable.
The change in the intercompany debt is reflected in the net cash provided by operating activities in the condensed
statements of cash activities.
We have revised our previously reported condensed statements of assets, liabilities, redeemable equity securities,
and stockholders’ deficit as of October 31, 2009 to reflect the correction of errors in those statements and the
effect of the adoption of new accounting guidance related to the accounting for convertible debt instruments that
may be settled in cash upon conversion (including partial cash settlement) and the accounting for non-controlling
interests. The 2009 and 2008 impact of these errors, totaling $10 million, was recognized in our 2010 condensed
statements of revenues and expenses as they were not material to our financial results for 2009 and 2008. The
revisions did not impact the condensed statements of cash activities for the years ended October 31, 2009 and
2008. See Note 1, Summary of significant accounting policies, of our 2010 audited financial statements for
further discussion.
Condensed Statements of Revenues and Expenses
Navistar International Corporation (with financial services operations on a pre-tax equity basis)
For the Year Ended October 31, 2010
Manufacturing
Operations
Financial
Services
Operations Adjustments
Consolidated
Statement of
Operations
(in millions)
Sales of manufactured products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . .
Engineering and product development costs . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense (income), net
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in loss of non-consolidated affiliates . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes and equity income from financial services
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity income from financial services operations . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Income attributable to non-controlling interests . . . . . . . . . . . . . . .
Net income (loss) attributable to Navistar International
11,926
—
11,926
9,741
(19)
1,293
464
154
48
11,681
(50)
195
95
290
23
267
(44)
$ —
309
309
—
4
119
—
113
(22)
214
—
95
—
95
—
95
—
$ —
$
(90)
(90)
—
—
(6)
—
(14)
(70)
(90)
—
—
(95)
(95)
—
(95)
—
11,926
219
12,145
9,741
(15)
1,406
464
253
(44)
11,805
(50)
290
—
290
23
267
(44)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
223
$
95
$
(95)
$
223
E-29
For the Year Ended October 31, 2009
Manufacturing
Operations
Financial
Services
Operations Adjustments
Consolidated
Statement of
Operations
(in millions)
Sales of manufactured products . . . . . . . . . . . . . . . . . . . . . . . . . . $
Finance revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of property and equipment
. . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . .
Engineering and product development costs . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,300
—
11,300
9,366
59
31
1,218
433
99
(179)
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in loss of non-consolidated affiliates . . . . . . . . . . . . . . . .
11,027
46
Income before income taxes, extraordinary gain and equity
income from financial services operations . . . . . . . . . . . . . . . .
Equity income from financial services operations . . . . . . . . . . . .
Income before income taxes and extraordinary gain . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before extraordinary gain . . . . . . . . . . . . . . . . . . .
Extraordinary gain, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Income attributable to non-controlling interests . . . . . . . . .
Net income (loss) attributable to Navistar International
319
40
359
37
322
23
345
(25)
$ —
348
348
—
—
—
130
—
162
16
308
—
40
—
40
—
40
—
40
—
$ — $
(79)
(79)
—
—
—
(4)
—
(10)
(65)
(79)
—
—
(40)
(40)
—
(40)
—
(40)
—
11,300
269
11,569
9,366
59
31
1,344
433
251
(228)
11,256
46
359
—
359
37
322
23
345
(25)
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
320
$
40
$
(40) $
320
E-30
For the Year Ended October 31, 2008
Manufacturing
Operations
Financial
Services
Operations Adjustments
Consolidated
Statement of
Operations
(in millions)
Sales of manufactured products . . . . . . . . . . . . . . . . . . . . . . . . . . $
Finance revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of property and equipment
. . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . .
Engineering and product development costs . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in income of non-consolidated affiliates . . . . . . . . . . . . . .
Income (loss) before income taxes, and equity income from
financial services operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity income from financial services operations . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: Income attributable to non-controlling interests . . . . . . . . .
Net income (loss) attributable to Navistar International
14,399
—
14,399
11,942
358
1,292
384
156
123
14,255
71
$ —
$ — $
(80)
(80)
—
—
(4)
—
—
(76)
(80)
—
—
24
24
—
24
—
$
$
14,399
325
14,724
11,942
358
1,437
384
469
14
14,604
71
191
—
191
57
134
—
405
405
—
—
149
—
313
(33)
429
—
(24)
—
(24)
—
(24)
—
215
(24)
191
57
134
—
$
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
134
$
(24)
$
24
$
134
E-31
Condensed Statements of Assets, Liabilities, Redeemable Equity Securities, and Stockholders’ Deficit
Navistar International Corporation (Manufacturing operations with financial services operations on a
pre-tax equity basis)
Manufacturing
Operations
As of October 31, 2010
Financial
Services
Operations Adjustments
Consolidated
Balance Sheet
(in millions)
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Finance and other receivables, net
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . .
Investments in and advances to financial services
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in non-consolidated affiliates . . . . . . . . . . . .
Deferred taxes, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
534
566
29
1,030
1,556
324
1,329
502
103
109
821
$
51
20
151
3,084
12
—
113
—
37
29
$ —
—
—
(168)
—
—
—
(502)
—
—
—
$
585
586
180
3,946
1,568
324
1,442
103
146
850
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,903
$
3,497
$
(670)
$
9,730
Liabilities, redeemable equity securities, and
stockholders’ equity (deficit)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits liabilities . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable equity securities . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity attributable to non-controlling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity (deficit) attributable to
1,974
1,985
2,066
1,802
7,827
8
49
controlling interest
. . . . . . . . . . . . . . . . . . . . . . . . . . .
(981)
Total liabilities, redeemable equity securities, and
$
21
2,885
34
55
2,995
—
—
502
$
(168)
—
—
—
(168)
—
—
$
1,827
4,870
2,100
1,857
10,654
8
49
(502)
(981)
stockholders’ equity (deficit) . . . . . . . . . . . . . . . . . . .
$
6,903
$
3,497
$
(670)
$
9,730
E-32
(in millions)
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents . . . . . . . . . . . . . . . .
Finance and other receivables, net
. . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . .
Investments in financial services operations . . . . . . . . . . .
Investments in non-consolidated affiliates . . . . . . . . . . . .
Deferred taxes, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing
Operations
As of October 31, 2009(A)
Financial
Services
Operations Adjustments
Consolidated
Balance Sheet
$
1,152
30
915
1,634
318
1,345
423
62
107
517
$
60
455
3,358
32
—
122
—
—
57
52
$ —
—
(188)
—
—
—
(423)
—
—
—
$
1,212
485
4,085
1,666
318
1,467
—
62
164
569
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,503
$
4,136
$
(611)
$
10,028
Liabilities, redeemable equity securities, and
stockholders’ equity (deficit)
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits liabilities . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable equity securities . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity attributable to non-controlling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity (deficit) attributable to Navistar
International Corporation . . . . . . . . . . . . . . . . . . . . .
Total liabilities, redeemable equity securities, and
1,929
1,861
2,660
1,727
8,177
13
61
(1,748)
$
131
3,431
33
118
3,713
—
—
423
$
(188)
—
—
—
(188)
—
—
$
1,872
5,292
2,693
1,845
11,702
13
61
(423)
(1,748)
stockholders’ equity (deficit) . . . . . . . . . . . . . . . . . . .
$
6,503
$
4,136
$
(611)
$
10,028
(A) Revised; See Note 1, Summary of significant accounting policies
E-33
Condensed Statements of Cash Activities
Navistar International Corporation (with financial services operations on a pre-tax equity basis)
For the Year Ended October 31, 2010
Manufacturing
Operations
Financial
Services
Operations Adjustments
Condensed
Consolidated
Statement of
Cash Flows
$
267
$
95
$
(95)
$
267
(in millions)
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . .
Depreciation of equipment leased to others . . . . . . . .
Amortization of debt issuance costs and discount . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Equity in loss of non-consolidated affiliates . . . . . . .
Equity in income of financial services affiliates . . . .
Dividends from non-consolidated affiliates . . . . . . . .
Change in intercompany receivables and payables . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
261
27
26
(3)
50
(95)
5
11
(140)
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
409
Cash flows from investing activities
Purchases of marketable securities . . . . . . . . . . . . . . . . . . .
Sales or maturities of marketable securities . . . . . . . . . . . .
Net change in restricted cash and cash equivalents . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of equipment leased to others . . . . . . . . . . . . . . .
Acquisition of intangibles . . . . . . . . . . . . . . . . . . . . . . . . .
Business acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the
(1,856)
1,290
1
(232)
(16)
(15)
(2)
(86)
(916)
(110)
(1)
(618)
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,152
Cash and cash equivalents at end of the period . . . . . . .
$
534
$
E-34
4
24
12
20
—
—
—
(11)
554
698
(20)
—
514
(2)
(29)
—
—
9
472
(1,180)
1
(9)
60
51
—
—
—
—
—
95
—
—
—
—
—
—
—
—
—
—
—
10
10
(10)
—
—
—
$ —
265
51
38
17
50
—
5
—
414
1,107
(1,876)
1,290
515
(234)
(45)
(15)
(2)
(67)
(434)
(1,300)
—
(627)
1,212
$
585
(in millions)
Cash flows from operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . .
Depreciation of equipment leased to others . . . . . . . .
Amortization of debt issuance cost and discount . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of property and equipment, goodwill and
intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gain on acquisition of subsidiary . . . .
Gain on increased equity interest in subsidiary . . . . .
Equity in income of non-consolidated affiliates . . . .
Equity in income of financial services affiliates . . . .
Dividends from non-consolidated affiliates . . . . . . . .
Change in intercompany receivables and payables . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
Net cash provided by operating activities . . . . . . .
Cash flows from investing activities
Purchases of marketable securities . . . . . . . . . . . . . . . . . . .
Sales or maturities of marketable securities . . . . . . . . . . . .
Net change in restricted cash and cash equivalents . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of equipment leased to others . . . . . . . . . . . . . . .
Business acquisitions, net of escrow receipt
. . . . . . . . . . .
Other investment activities . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in cash and cash equivalents . . . . . . . . . . . . . .
Increase in cash and cash equivalents upon
consolidation of BDP and BDT . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Year Ended October 31, 2009
Manufacturing
Operations
Financial
Services
Operations Adjustments
Condensed
Consolidated
Statement of
Cash Flows
$
345
$
40
$
(40)
$
345
284
35
6
(14)
41
(23)
(23)
(46)
(40)
59
(82)
(8)
534
(382)
384
(23)
(148)
(2)
(60)
(51)
(282)
36
9
297
80
775
4
21
10
(4)
—
—
—
—
—
—
82
551
704
—
—
94
(3)
(44)
—
3
50
(780)
—
(26)
—
86
60
—
—
—
—
—
—
—
—
40
—
—
—
—
—
—
—
—
—
—
20
20
(20)
—
—
—
—
288
56
16
(18)
41
(23)
(23)
(46)
—
59
—
543
1,238
(382)
384
71
(151)
(46)
(60)
(28)
(212)
(764)
9
271
80
861
$ —
$
1,212
Cash and cash equivalents at end of the period . . . . . . .
$
1,152
$
E-35
(in millions)
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . .
Depreciation of equipment leased to others . . . . . . . .
Amortization of debt issuance cost and discount . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill and intangibles . . . . . . . . . .
Equity in income of financial services affiliates . . . .
Equity in income of non-consolidated affiliates . . . .
Dividends from financial services operations . . . . . .
Dividends from non-consolidated affiliates . . . . . . . .
Change in intercompany receivables and payables . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
Net cash provided by operating activities . . . . . . .
Cash flows from investing activities
Purchases of marketable securities . . . . . . . . . . . . . . . . . . .
Sales or maturities of marketable securities . . . . . . . . . . . .
Net change in restricted cash and cash equivalents . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of equipment leased to others . . . . . . . . . . . . . . .
Business acquisitions, net of escrow receipt
. . . . . . . . . . .
Contributions to NFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of the
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of the period . . . . . . .
For the Year ended October 31, 2008
Manufacturing
Operations
Financial
Services
Operations Adjustments
Condensed
Consolidated
Statement of
Cash Flows
$ 134
$ (24)
$ 24
$ 134
328
44
5
82
372
24
(71)
25
85
(71)
(528)
429
(42)
46
7
(168)
—
(60)
—
1
(216)
(133)
(21)
59
716
$ 775
1
20
10
(26)
—
—
—
—
—
71
664
716
—
—
(150)
(8)
(39)
—
—
20
(177)
(508)
(6)
25
61
$ 86
—
—
—
—
—
(24)
—
(25)
—
—
—
(25)
—
—
—
—
—
60
—
—
60
(35)
—
—
—
$—
329
64
15
56
372
—
(71)
—
85
—
136
1,120
(42)
46
(143)
(176)
(39)
—
—
21
(333)
(676)
(27)
84
777
$ 861
E-36
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[THIS PAGE INTENTIONALLY LEFT BLANK]
Expanding Product Lineup Leverages Our Assets, Positions Us for Growth
2007
2011
Common Platform
Common Platform
Global Powertrain
WorkStar
DuraStar
9900
DuraStar
ProStar+
Vesta
MN25
4.8L
7.2L
School Bus
TranStar
9200/9400
Engines
7
Purchased Engines
WorkStar
LoneStar
Continental Mixer
9900
School Bus
TranStar
eStar
ATX-6
9.3L
7
DT & 10
11 & 13
15
DT & 10
Cummins ISX
ISX
i
C
MaxxPro
MXT
9200/9400
7000 Series
TerraStar
PayStar
CAT C15
7000-MV
AC Bus
DuraStar Hybrid
Michael N. Hammes
Lead Director, Retired Chairman and Chief
Executive Offi cer of Sunrise Medical Inc.,
a designer, manufacturer and marketer
of home medical equipment worldwide
Committees: 1, 2, 3 (Chair), 4 (Chair)
William H. Osborne
Former President & CEO of Federal
Signal Corporation, a manufacturer and
marketer of fi re, safety and municipal
infrastructure equipment
Committee: 4
David D. Harrison
Retired Executive Vice President and
Chief Financial Offi cer of Pentair, Inc.,
a global manufacturing company
Committees: 2, 5
James H. Keyes
Retired Chairman of the Board of
Johnson Controls, Inc., an automotive
system and facility management and
control company
Committees: 1, 2, 3, 5 (Chair)
Steven J. Klinger
President and Chief Operating Offi cer
of Smurfi t-Stone Container Corporation,
a global paperboard and paper-based
packaging company
Committees: 2, 5
SEC Filings
Filings with the U.S. Securities and
Exchange Commission, including
the latest 10-K and proxy statement,
are available on our Website at
http://ir.navistar.com/
Transfer Agent
For inquiries regarding name changes,
changes of address or missing
certifi cates, please contact our
shareholder service provider:
BNY Mellon Shareowner Services
P.O. Box 3315
South Hackensack, NJ 07606-1915
480 Washington Blvd.
Jersey City, NJ 07310
Telephone: (888) 884-9359
Dennis D. Williams
Secretary, Treasurer and Director of Agricultural
Implement and Transnational Departments,
United Auto Workers, an international union
Committee: 4
COMMITTEES:
1. Executive
2. Compensation
3. Nominating and Governance
4. Finance
5. Audit
Stock Trading Information
Navistar International Corporation is
listed on the New York Stock Exchange.
Ticker Symbol: NAV
Independent Auditor
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
Corporate Headquarters
Navistar International Corporation
4201 Winfi eld Road
Warrenville, IL 60555
Telephone: (630) 753-5000
BOARD OF DIRECTORS
Daniel C. Ustian
Chairman, President and Chief
Executive Offi cer of Navistar
International Corporation
Committee: 1
Eugenio Clariond
Retired Chairman and Chief Executive
Offi cer of Group IMSA, S.A., a producer
of steel, plastic, aluminum and other
related products
Committees: 3, 4
John D. Correnti
Chairman and Chief Executive Offi cer of
Steel Development Company, LLC, a steel
mill operational and development company
Committees: 2 (Chair), 3, 5
Diane H. Gulyas
President of Performance Polymers, which
contains three business units—engineering
polymers, elastomers and fi lms—E.I. du Pont
de Nemours & Company, a science-
based products and services company
Committee: 4
SHAREHOLDER INFORMATION
Annual Meeting
The annual meeting of shareholders
will be held at 11:00 a.m. Central time
Tuesday, February 15, 2011, at:
Hilton Chicago
720 South Michigan Avenue
Chicago, IL 60603
USA
Investor Relations
For information about shareholder
matters, please contact the investor
relations team:
Website: http://ir.navistar.com/
Telephone: (630) 753-2143
Email: investor.relations@navistar.com
REG G GAAP RECONCILIATION
($ Millions except per share data)
Manufacturing segment profi t* (excluding items listed below)
Ford settlement net of related charges
Impairment of property, plant and equipment
Manufacturing Segment Profi t*
Corporate items (excluding items listed below)
Write-off debt issuance cost
Total Corporate Items
Interest Expense, Corporate
Financial Services profi t (loss)
Subtotal–below the line
FY 2007
FY 2008
FY 2009
FY 2010
$462
-
-
462
(435)
(31)
(466)
(196)
127
(535)
(73)
(47)
(120)
(1.27)
-
-
(0.43)
(1.70)
70.3
$1,088
(37)
(358)
693
(322)
-
(322)
(156)
(24)
(502)
191
(57)
134
7.21
(0.50)
(4.89)
-
1.82
73.2
$707
160
(31)
836
(418)
(11)
(429)
(90)
40
(479)
357
(37)
320
2.86
2.19
(0.43)
(0.16)
4.46
71.8
$741
-
-
741
(451)
-
(450)
(140)
95
(495)
246
(23)
223
3.05
-
-
-
3.05
73.2
Income (loss) excluding income tax
Income tax expense
Net Income (loss) attributable to Navistar International Corporation
Diluted earnings per share attributable to Navistar International Corporation (excluding items listed below)
Ford settlement net of related charges
Impairment of property, plant and equipment
Write-off debt issuance cost
Diluted earnings (loss) per share ($’s) attributable to Navistar International Corporation
Weighted average shares outstanding: diluted (millions)
* Includes: non-controlling interest in net income of subsidiaries net of tax; extraordinary gain net of tax
FORWARD-LOOKING STATEMENT
The fi nancial measures presented above are unaudited non-GAAP. This is not in accordance with, or an alternative for, U.S. generally accepted accounting principles (GAAP). The non-GAAP fi nancial information presented herein should be considered
supplemental to, and not as a substitute for, or superior to, fi nancial measures calculated in accordance with GAAP. However, we believe that non-GAAP reporting, giving effect to the adjustments shown in the reconciliation above, 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 of our operating
segments. We have chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of operating results, to illustrate the results of operations giving effect to the non-GAAP
adjustments shown in the above reconciliations, and to provide an additional measure of performance.
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12/30/10 11:03 AM
Navistar International Corporation
4201 Winfi eld Road
Warrenville, IL 60555
www.navistar.com
E
Printed on recycled paper
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