Navistar International Corp Annual Report 2018

FY2018 Annual Report · Navistar International Corp

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2018 Annual Report

To stockholders, employees and customers:

In 2018, Navistar moved decisively into growth mode. Completing the refresh of its
entire product line, the company grew both volume and share, pointing the way to an
even better future.

Overall market share in Core markets increased for the second consecutive year. The
International® LT® Series and the International® A26 big-bore engine enabled
Navistar to grow Class 8 market share, the only OEM to do so this year. Class 8 share
for the year was 13.5 percent, compared with 11.8 percent in 2017, while Class 8
heavy market share increased by 2.5 share points.

IC Bus® products, including alternative-fuel school buses, grew market share by 1.3
share points. The new truck products launched in 2018, the vocational International®
HV™ Series and medium-duty International® MV™ Series, improved order share and
built a strong backlog. Entering fiscal 2019, backlogs in the medium-duty and
vocational segments are three times as large as the year before.

All four reporting segments – Truck, Parts, Global Operations and Financial Services
– posted higher revenues. With sustained cost discipline, that growth translated into an
improved bottom line, as the company achieved its second consecutive year of
profitability and its sixth straight year of improved adjusted EBITDA. Navistar
demonstrated significant improvement on virtually every key metric, including
chargeouts, revenues, gross margin and net income.

In 2018, Navistar also achieved positive free cash flow on a full-year basis. The
company paid off its October 2018 convertible notes with cash on hand, and
concluded the fiscal year with a strong cash balance that will help to address April
2019 convertible maturities as well. Thanks to steps taken earlier in the fiscal year, no
other debt maturities are scheduled before 2025. Also significantly reduced were
pension and OPEB liabilities, warranty liability balance and gross used truck
inventories. Legacy issues moved even farther into the rear-view mirror.

Entering 2019 with Momentum

The company is facing forwards, addressing the challenges and opportunities of 2019
and the years ahead.

2019 is shaping up as another very good year for the industry, with volumes
comparable to 2018. Freight demand and carrier profit are both strong, and robust
truck sales are expected to continue. Current forecasts indicate Class 8 sales will
remain well above replacement demand through 2019, while Class 6 and 7 sales will

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also remain strong due to high replacement demand and growth in key economic
sectors.

Entering the new fiscal year, the production backlog is three times higher than it was
this time last year. Navistar is well situated to take advantage of production
opportunities in 2019, positioning the company to grow volume and share.

A number of additional steps have been taken in the new fiscal year to build the new
Navistar. In November 2018, the new International® CV™ Series was launched,
putting the company back into the Class 4/5 segment. That same month, Navistar
announced the creation of a new eMobility business unit led by Gary Horvat, formerly
Chief Technology Officer at Proterra, the industry’s leading electric city bus supplier.
The investment in this new business unit highlights the importance that Navistar
places on emerging technologies, and supports future electric-powered product
development.

In December 2018, focus on the core business was strengthened with the sale of 70
percent of the Navistar Defense business to Cerberus Capital Management. This
transaction provides a well-established, long-term partner.

With a new product lineup, quality improvements and strengthened Uptime focus,
Navistar expects to gain market share in 2019 for the third year in a row.

Poised to Create Superior Shareholder Value

The many foundational improvements achieved in the last five years, including 2018,
put the company in position to generate superior shareholder value.

Shareholder value, based on stock price appreciation, is a function of future earnings
growth and cash flow growth. Management’s assessment is that no other truck OEM
has a better opportunity to grow earnings and cash flow than Navistar. The company
has upside potential that is superior to that of the industry, based on several factors.

Strong Momentum on Market Share

First, Navistar has demonstrated the capability to regain market share lost earlier this
decade. No other truck OEM has equivalent potential to increase its revenue from
truck sales.

Much of this opportunity is based on fielding the industry’s newest product lineup,
which is part of an overall solution that emphasizes superior Uptime and lower Total
Cost of Ownership. The Navistar team is working with the International® and IC Bus®
dealer networks to invest in an improved customer experience, superior Uptime and
lower Total Cost of Ownership for current and prospective customers.

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Reduced Costs, Increased Revenues and Margins

The company’s alliance with TRATON Group positions Navistar to make more
progress to lower material costs and grow margins. Leveraging the global scale of the
alliance’s procurement joint venture will allow Navistar to offset commodity and
supplier cost increases.

The technology collaboration with TRATON Group will also enable Navistar to
introduce fully integrated powertrains combining optimized performance with more-
efficient development cost.

Navistar also has the unique potential to benefit from parts revenue growth. The
International vehicle parc will grow with market share gains, and the new, proprietary
powertrains developed with TRATON Group will provide improved parts
opportunities in trucks and buses.

There is also upside opportunity on pricing. With legacy issues largely in the past,
Navistar can increasingly take price to reflect improved quality in its products and
services, and higher value to its customers.

With lower material costs, more margin will find its way to the bottom line. And as
free cash flow is available to pay down the company’s debt load, interest expense will
come down, and net income will improve substantially.

Strong, Multifaceted Rationale for Investment

To recap, 2019 should be another strong year for Navistar and the industry. However,
Navistar as an investment is much more than just a cycle play. As recent
accomplishments show, the company also has exceptional opportunities to benefit by
recapturing market share, growing parts revenue, improving margins, generating free
cash flow and further de-risking and de-levering the balance sheet. Other OEMs do
not have as significant an opportunity for relative improvement.

For all these reasons, management’s assessment is that Navistar is the best investment
opportunity among all the truck OEMs. With the strong gains made in 2018, the
company is poised to take full advantage of 2019 opportunities, and has a clear
roadmap to sustained future progress that will set it apart in the industry.

Troy A. Clarke
Chairman, President and CEO

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Financial Summary

(in millions, except per share data)
Sales and revenues, net
Segment Results:

For the Years Ended October 31,

2018
$ 10,250 $

2017

8,570 $

2016
8,111

Truck .......................................................................................... $
Parts ...........................................................................................
Global Operations ......................................................................
Financial Services ......................................................................

Income (loss) from continuing operations before income taxes ....... $
Income (loss) from continuing operations, net of tax(A) ..................
Net income (loss)(A) .........................................................................

Diluted earnings (loss) per share from continuing operations(A) ..... $
Diluted earnings (loss) per share(A) ..................................................

397 $
569
2
88

420 $
340
340

3.41 $
3.41

(6) $

616
(7)
77

64 $
29
30

(189)
640
(21)
100

(32)
(97)
(97)

0.31 $
0.32

(1.19)
(1.19)

(cid:3)

(A) Amounts attributable to Navistar International Corporation.

Annual Meeting
The annual meeting of stockholders will be held at
11:00 a.m. Central time, Tuesday, February 12, 2019,
in Navistar’s main auditorium at 2701 Navistar
Drive, Lisle, IL 60532 USA

Investor Relations
For information about stockholder matters, please
contact the investor relations team:
Website:
https://www.navistar.com/navistar/investors/
Telephone: (331) 332-2143

SEC Filings
Filings with the U.S. Securities and Exchange
Commission, including the latest 10-K and proxy
statement, are available online at
http://www.navistar.com/navistar/investors/financials/
sec

Registrar
For inquiries regarding name changes, changes of
address or missing certificates, please contact our
stockholder service provider: Transfer Agent and
Registrar, Computershare Investor Services by,
Regular Mail:
P.O. Box 505000
Louisville, KY 40233 USA; or
Overnight Delivery:
462 South 4th Street, Suite 1600
Louisville, KY 40202 USA
Website: www.computershare.com/investor
Telephone: (888) 884-9359

Stock Trading Information
Navistar International Corporation is listed on the
New York Stock Exchange. Ticker Symbol: NAV

Independent Auditor
KPMG LLP
200 East Randolph St., Suite 5500
Chicago, IL 60601 USA

Corporate Headquarters
Navistar International Corporation
2701 Navistar Drive
Lisle, IL 60532 USA
Telephone: (331) 332-5000

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________

(Mark One)

Form 10-K

___________________________________________________

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

For the fiscal year ended October 31, 2018

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____.

Commission file number 1-9618
___________________________________________________

NAVISTAR INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)
_______________________________________________

Delaware
(State or other jurisdiction of incorporation or organization)

36-3359573
(I.R.S. Employer Identification No.)

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

60532

(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common stock (par value $0.10)
Cumulative convertible junior preference stock, Series D (par value $1.00)

Name of each exchange on which registered
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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes

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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer
Non-accelerated filer

Accelerated filer
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
As of April 30, 2018, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $1,272 million.

As of November 30, 2018, the number of shares outstanding of the registrant’s common stock was 98,900,635, net of treasury shares.

Documents incorporated by reference: Portions of the Company's proxy statement for the 2019 annual meeting of stockholders scheduled to be held on
February 12, 2019 are incorporated by reference in Part III.

NAVISTAR INTERNATIONAL CORPORATION 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.
Item 4. Mine Safety Disclosures ....................................................................................................................................

Item 5.

PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities............................................................................................................................................................
Item 6.
Selected Financial Data......................................................................................................................................
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.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................
Item 9A. Controls and Procedures ....................................................................................................................................
Item 9B. Other Information ..............................................................................................................................................

PART III

Item 10. Directors, Executive Officers, and Corporate Governance................................................................................
Item 11. Executive Compensation ...................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .........
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence ..................................................
Principal Accountant Fees and Services ............................................................................................................
Item 14.

Item 15. Exhibits and Financial Statement Schedules .....................................................................................................
Summary ............................................................................................................................................................
Item 16.
Signatures...........................................................................................................................................................

PART IV

Page

27
56

131
131
131

132

133

134

EXHIBIT INDEX:

Exhibit 3

Exhibit 4

Exhibit 10

Exhibit 21

Exhibit 23.1

Exhibit 24

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 32.2

Exhibit 99.1

Disclosure Regarding Forward-Looking Statements

Information provided and statements contained in this report that are not purely historical are forward-looking statements
within the meaning of the federal securities laws. Such forward-looking statements only speak as of the date of this report and
Navistar International Corporation assumes no obligation to update the information included in this report.

Such forward-looking statements include, but are not limited to, statements concerning:

•

estimates we have made in preparing our financial statements;

our expectations and estimates relating to the impact of the federal Tax Cuts and Jobs Act (the “Tax Act”) on our
business and financial condition;

the implementation of, and expected benefits from, our strategic alliance with TRATON AG (formerly Volkswagen
Truck & Bus AG) and certain of its subsidiaries and affiliates ("TRATON Group");

our development and launch of new products and technologies;

anticipated sales, volume, demand, markets for our products, and financial performance;

anticipated performance and benefits of our products and technologies;

our business strategies relating to, and our ability to meet, federal and state regulatory heavy-duty diesel emissions
standards applicable to certain of our engines, including the timing and costs of compliance and consequences of
noncompliance with such standards, as well as our ability to meet other federal, state and foreign regulatory
requirements;
our business strategies and short-term and long-term goals, and activities to accomplish such strategies and goals;

our ability to implement our strategy focused on growing the core business (i.e., the truck and parts markets for the
United States and Canada, where we participate primarily in the Class 6 through 8 vehicle market segments (the
“Core” business and “Core” markets)), driving operational excellence, pursuing innovative technology solutions,
leveraging the TRATON Group strategic alliance, continuing our commitment to a customer-centric approach,
enhancing cross functional teamwork and our winning culture, and improving our financial performance, as well as the
results we expect to achieve from the implementation of our strategy;

our expectations related to new product launches;

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

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

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

our expectations relating to debt refinancing activities;

our expectations relating to the potential effects of anticipated divestitures and closures of businesses;

our expectations relating to our cost-reduction actions and actions to reduce discretionary spending;

our expectations relating to our ability to service our long-term debt;

our expectations relating to our wholesale and retail finance receivables and revenues;

liabilities resulting from environmental, health and safety laws and regulations;

our anticipated capital expenditures;

our expectations relating to payments of taxes;

our expectations relating to warranty costs;

our expectations relating to interest expense;

our expectations relating to impairment of goodwill and other assets;

costs relating to litigation and similar matters;

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

our expectations relating to commodity price risk, including the impact of tariff increases or potential new tariffs; and

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

These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or similar
expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and
assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many
factors that could affect our results of operations and could cause actual results to differ materially from those in the forward-
looking statements. Factors that could cause or contribute to differences in our future financial results include those discussed in
Item 1A, Risk Factors, set forth in Part I, as well as those factors discussed elsewhere in this report. All future written and oral
forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained herein or referred to above. Except for our ongoing obligations to disclose material information as
required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any
forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.

Available Information

We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and as a result, are obligated to file annual, quarterly, and current reports, proxy statements, and other
information with the United States ("U.S.") Securities and Exchange Commission ("SEC"). We make these filings available free
of charge on our website (http://www.navistar.com) as soon as reasonably practicable after we electronically file them with, or
furnish them to, the SEC. Information on our website does not constitute part of this Annual Report on Form 10-K. In addition,
the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information
statements, and other information we electronically file with, or furnish to, the SEC.

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 entities are Navistar, Inc. ("NI") and Navistar Financial Corporation ("NFC"). References herein to
the "Company," "we," "our," or "us" refer to NIC and its consolidated subsidiaries, including certain variable interest entities
("VIEs") of which we are the primary beneficiary. We report our annual results for our fiscal year, which ends October 31. As
such, all references to 2018, 2017, and 2016 contained within this Annual Report on Form 10-K relate to the applicable fiscal
year unless otherwise indicated.

Overview

We are an international manufacturer of International® brand commercial and military trucks, proprietary diesel engines, and IC
Bus® ("IC") brand school and commercial buses, as well as a provider of service parts for trucks and diesel engines. We also
provide retail, wholesale, and lease financing services for our trucks and parts.

Our Products and Services

Our principal products and services include:

• Trucks—We manufacture and distribute Class 4 through 8 trucks and buses in the common carrier, private carrier,

government, leasing, construction, energy/petroleum, military vehicle, and student and commercial transportation markets
under the International® and IC brands. We design and manufacture proprietary diesel engines for our International
branded trucks and military vehicles and IC branded buses.

• Parts—We support our International® brand commercial and military trucks, IC brand buses, and our proprietary engines,
as well as our other product lines, by distributing proprietary products together with a wide selection of other standard
truck, trailer, and engine service parts.

• Financial Services—We provide and manage retail, wholesale, and lease financing of products sold by the Truck and

Parts segments, as well as their dealers, within the U.S., Canada and Mexico.

Our Strategy

Our Business

Our Core business is the truck and parts markets for the United States and Canada, where we participate primarily in the
Class 6 through 8 vehicle market segments. With more than a million trucks on the road in the United States and Canada,
nearly one in four Class 6 through 8 vehicles is an International® truck. Nearly half of all school buses on the road today are
our IC brand. We have one of the largest commercial vehicle parts distribution networks in the United States and a captive
finance company. Outside of our Core markets, International® is one of the leading truck brands in Mexico and much of
Latin America. We are the largest independent diesel engine company in Brazil, with our wholly-owned subsidiary
International-Industria Automotiva da America do Sul Ltda. (“IIAA”), formerly MWM International-Industria de Motores da
America Do Sul Ltda. We also export trucks, buses, and engines to niche markets around the world.

We continue to take actions that we believe will improve our performance and evaluate additional opportunities to enhance
value for our customers. The following is a summary of our 2018 accomplishments and our expectations going forward.

Our 2018 Accomplishments

We continue to show positive progress on our top priorities as we move from a turn-around phase to a growth phase. In 2018,
we ended with a significant volume increase and we were the only brand to increase Class 8 market share.

I. Sales: In 2018, we increased our Class 8 market share in a strong industry environment by nearly 2%, and our Core
chargeout volumes ended at 73,900. Overall Class 6-8 retail market share was higher than the prior year. Our all-
makes Fleetrite® brand experienced double-digit growth year over year for our overall Parts segment (U.S., Canada,
Mexico and export).

Product Launches: We focused on our Core markets and invested in product development to increase customer
value, improve our customers’ business and enhance customer experience.

• Truck: In January 2018, we announced the International® HV™ Series Mid-Range Diesel which includes a
bridge formula truck for the concrete industry. In March 2018, we announced the International® MV™ Series
Mid-Range Diesel model, our new medium-duty truck.

• Bus: In February 2018, we announced the newly updated IC Bus® RE Series Type D school bus featuring remote

diagnostics connectivity solutions. In July 2018, IC Bus® became the first school bus original equipment
manufacturer (OEM) to make electronic stability control and collision mitigation standard on all IC Bus models
with air brakes.

II. Strategic Alliance: Our strategic alliance with TRATON Group continues to progress. Within the strategic alliance, the
parties formed a joint venture to make recommendations for sourcing, evaluating and negotiating joint procurement
opportunities.

• The procurement joint venture has continued to give us access to global scale to achieve significant cost

reductions. To date, our procurement joint venture has delivered over 90% of the target the parent companies had
set for the first 24 months. It has identified a pipeline of additional projects to deliver the cumulative savings
projected over the first five years.

• The rest of the strategic alliance is on plan to deliver technology and other synergies:

1. Pursuing medium-duty vehicle electric powertrain.
2. Collaborating on fully integrated, next generation diesel big bore powertrains.
3. Collaborating on connected vehicle hardware and service solutions.

III. Quality and Uptime: Our focus on improving quality and uptime can best be seen in the reduction of dealer dwell

time through improvements in diagnostic and repair procedures.

• Warranty expense as a percentage of manufacturing revenue has decreased to 1.7%, from 2.4% in the prior year.
• Our new product command center (“Command Center”) focuses on dwell time improvement for our new

products. In 2018, the percent of repairs completed in 24 hours on our new 13L A26 engine improved by 10
percentage points.

IV. OnCommand Connection (“OCC”): OCC is our unique open architecture, all-brands remote diagnostics system

focusing on improving vehicle uptime for our customers.

• OCC supports the Command Center using proactive diagnostics and predictive tools.
• We have over 600,000 vehicles actively reporting in OCC of which over 75% report via telematics.
• We continue to add telematics partners to our portfolio.
•

In 2018, we launched OCC Telematics which includes access to the OCC Portal as a standard feature on our
RH™, LT™ and Lonestar products.

V. Cost Management: Focus on lowering material costs in our procurement and engineering organizations has resulted

in improved margins.

Our Expectations Going Forward

Going forward, we believe we are well-positioned and have the right strategic vision in place to build upon our 2018
accomplishments. We intend to be the number one choice and the most customer focused, innovative and value-creating truck
and bus solution provider in the Americas. To do that, we will prioritize and focus on closing the gaps before setting the new
standard. The strategic vision includes areas of focus centered around:

• Customer-Centric
• Operational Excellence
• Core Business
• Business Transformation
•
Strategic Alliance with TRATON Group and
• Cross-Functional Teamwork and a Winning Culture

By focusing on customer and market segmentation, we believe we will be able to better align our efforts with customer-specific
applications and product requirements. We plan to continue to drive improvement of key performance metrics and we are
committed to enhance customer value. We are operating with great care to execute flawless launches. We will further
investigate electrification and build our eCommerce business to support our ease of doing business initiative. Together with our
strategic alliance partner, TRATON Group, we expect to have a fully integrated proprietary powertrain as early as 2020, expect
to launch the next generation connectivity module allowing feature sharing, and expect to launch an electric medium-duty truck
and electric school bus. We intend to further develop our team-based organization, enhance collaborative work environments,
and utilize visual management tools. We expect our financial performance to continue to improve due to savings from expected
cost reduction actions and revenue growth.

Our Operating Segments

We operate in four industry segments: Truck, Parts, Global Operations (collectively referred to as "Manufacturing operations"),
and Financial Services, which consists of NFC and our foreign finance operations (collectively referred to as "Financial
Services operations"). Corporate contains those items that do not fit into our four segments. Selected financial data for each
segment can be found in Note 14, Segment Reporting, to the accompanying consolidated financial statements.

Truck Segment

Our Truck segment manufactures and distributes Class 4 through 8 trucks, buses, and military vehicles under the International
and IC brands, along with production of proprietary engines, primarily in the North America markets that include the U.S.,
Canada, and Mexico. Our Truck segment also includes our truck export business under the International and IC brands as well
as products that support the military truck product lines. The proprietary engines produced in North America are primarily used
in our trucks and buses. Our strategy is to deliver the highest quality commercial trucks, buses, and military vehicles. We
continue to expand our markets, which includes the exportation of our truck and bus products. The Truck segment is our largest
operating segment based on total external sales and revenues.

We compete primarily in our Core markets. The Truck segment's manufacturing operations in the U.S. and Mexico consist
principally of assembling components manufactured by our suppliers, as well as designing, engineering, and producing certain
sheet metal components, including truck cabs, and proprietary engines.

The Truck segment's manufacturing operations also include the production of diesel engines, which are primarily used in our
trucks. The operations at our engine manufacturing facility consist principally of the assembly of components manufactured by
our suppliers, as well as machining operations relating to steel and grey-iron components. We market a portion of our
commercial products directly to large fleets and the remainder 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 through our distribution and service network retail outlets, which is comprised of 727
outlets in the U.S. and Canada and 89 outlets in Mexico, as of October 31, 2018, and our export truck operations, primarily in
Latin America. In addition, our network of used truck centers and International certified used truck dealers in the U.S. and
Canada provides trade-in support to our dealers and national accounts group, and markets all makes and models of
reconditioned used trucks to owner-operators and fleet buyers.

The Truck business competes on many dimensions, including customer service, price, ease-of-doing-business, uptime, and parts
availability. The markets in which the Truck segment competes are subject to considerable volatility and fluctuation in response
to cycles in the overall business environment. These markets are particularly sensitive to the industrial sector, which generates a
significant portion of the freight tonnage hauled. Government regulation has also impacted, and will continue to impact,
trucking operations as well as the efficiency and specifications of trucking equipment.

The Class 4 through 8 truck and bus markets in North America are highly competitive. Major U.S.-controlled domestic
competitors include PACCAR Inc. ("PACCAR"), which sells vehicles under the Kenworth and Peterbilt nameplates in North
America, and Ford Motor Company ("Ford"). Competing foreign-controlled domestic manufacturers include Freightliner and
Western Star (both subsidiaries of Daimler-Benz AG ("Mercedes Benz")), Volvo and Mack (both subsidiaries of Volvo Global
Trucks), and Hino (a subsidiary of Toyota Motor Corporation ("Toyota")). Major U.S. military vehicle competitors include
BAE Systems, General Dynamics Land Systems, and Oshkosh Corporation. In addition, smaller, foreign-controlled market
participants such as Isuzu Motors America, Inc. ("Isuzu"), UD Trucks North America (a subsidiary of AB Volvo ("UD
Trucks")), and Mitsubishi Motors North America, Inc. ("Mitsubishi") are competing in the U.S. and Canadian truck markets
with primarily imported products. In Mexico, the major domestic competitors are Kenmex (a subsidiary of PACCAR) and
Freightliner. In our primary truck export market of Latin America, we compete with many truck manufacturers, including
PACCAR, Freightliner, and Mack.

Parts Segment

Our Parts segment provides customers with proprietary products needed to support the International commercial truck, IC Bus,
proprietary engine lines, and export parts business, as well as our other product lines by providing customers with proprietary
products together with a wide selection of other standard truck, trailer, and engine service parts. We distribute service parts
through the dealer network that supports our trucks and engines. The Parts segment is our second largest operating segment
based on total external sales and revenues.

Our extensive dealer channel provides us with an advantage in serving our customers by having our parts available when and
where our customers require service. Goods are delivered to our customers either through one of our eleven parts distribution
centers operated out of North America, or through direct shipment from our suppliers. We have a dedicated parts sales team
within North America, as well as national account teams focused on large fleet customers. We also serve our global markets

through our dedicated export business which supports customers globally in Latin America, the Middle East, northern Africa,
South Africa, Europe, Australia, Asia and Russia. In conjunction with the Truck sales and technical service group, we provide
an integrated support team that works to find solutions to support our customers.

The Parts business competes on many dimensions including customer service, price, ease-of-doing-business, and parts
availability. We sell a substantial amount of all-make parts for light-, medium- and heavy-duty trucks ("All-Make parts"), which
are common across OEM truck manufacturers. We sell remanufactured parts through our ReNEWed product line and private
label products through our Fleetrite brand name. The dealers and fleets have multiple outlets to purchase All-Make parts
including other OEMs (including but not limited to Freightliner, PACCAR, Mack and Volvo), independent distributors, and
traditional retail outlets, including Fleetpride, TruckPro, and National Auto Parts Association ("Napa"). In addition, our Uptime
Parts business sells directly to customers. We sell a wide-range of proprietary parts, and we are subject to varying degrees of
competition for many of our proprietary parts from alternative parts-providers and independent remanufacturers.

Also included in the Parts segment is our Blue Diamond Parts, LLC ("BDP") joint venture with Ford, which manages the
sourcing, merchandising and distribution of certain service parts for North America Ford vehicles. Major competitors for our
BDP joint venture include Alliant Power, Jasper Engine Transmissions, and Delphi Automotive.

Global Operations Segment

Our Global Operations segment includes businesses that derive revenue from outside our Truck and Parts segments and
primarily consists of the operations of our wholly-owned subsidiary, IIAA. IIAA is a leader in the South American mid-range
diesel engine market, manufacturing and distributing mid-range diesel engines and providing customers with additional engine
offerings in the agriculture, marine, genset, and light truck markets. Additionally, we also sell our engines to global OEMs for
various on-and-off-road applications. We offer contract manufacturing services under IIAA's MWM brand to OEMs for the
assembly of their engines, particularly in South America. IIAA has a very significant dealer network and Parts Distribution
Center, responsible for internal and export sales of spare parts. As part of the Global Operations segment, IIAA has engine
manufacturing operations in Brazil and Argentina. The Global Operations segment is our third largest operating segment based
on total external sales and revenues.

Our commercial products are marketed through our independent dealer network, which offers a comprehensive range of
services and other support functions to our end users.

IIAA also has a commercial agreement with an Indian company, Mahindra Heavy Engines Ltd. ("Mahindra"), under which
MWM engines (4.8L and 7.2L) are manufactured at a plant located in the Chakan Industrial Area - city of Pune/India. The
engines produced at that plant are exclusively sold by MWM outside of the Indian market, providing a cost competitive export
platform in support of the Asian markets.

In Brazil, IIAA's engines compete with Cummins, Mercedes Benz, and Fiat Powertrain ("FPT") in the light and medium truck
markets; Mercedes Benz, Cummins, Scania, MAN, Volvo, and FPT in the heavy truck market; Mercedes Benz in the bus
market; New Holland (a subsidiary of CNH Industrial N.V.), Sisu Diesel (a subsidiary of AGCO Corporation), and Deere &
Company in the agricultural market; and Scania and Cummins in the stationary market.

Financial Services Segment

Our Financial Services segment provides and manages retail, wholesale, and lease financing of products sold by the Truck and
Parts segments and their dealers. We also finance wholesale and retail accounts receivable. Substantially all revenues earned by
the Financial Services segment are derived from supporting the sales of our vehicles and products. The Financial Services
segment continues to meet the primary goal of providing and managing financing to our customers in U.S., Canada and Mexico
markets by providing or arranging cost-effective funding sources, while working to mitigate credit losses and impaired vehicle
asset values. NFC provides wholesale financing for 100% of new truck inventory sold to our dealers and distributors in the U.S.
through the customary free interest period offered by NI. At October 31, 2018 and 2017, NFC retained floor plan financing for
approximately 74% and 77% of the dealers, respectively, after the expiration of any free interest period. The Financial Services
segment also facilitates financing relationships in other countries to support our Manufacturing Operations.

The Financial Services segment manages the relationship with Navistar Capital (a program of BMO Harris Bank N.A. and
Bank of Montreal (together, "BMO")). Navistar Capital is our third-party preferred source of retail and lease customer financing
for equipment offered by us and our dealers in the U.S. In addition, Navistar Capital Canada (also a BMO program) provides
financing to support the sale of our products in Canada.

Government Contracts

As a U.S. government contractor, we are subject to specific regulations and requirements as mandated by our contracts. These
regulations include Federal Acquisition Regulations, Defense Federal Acquisition Regulations, and the Code of Federal
Regulations. We are also subject to routine audits and investigations by U.S. government agencies such as the Defense Contract
9

Management Agency and Defense Contract Audit Agency. These agencies review and assess compliance with contractual
requirements, cost structure, cost accounting, and applicable laws, regulations, and standards.

A portion of our existing U.S. government contracts extend over multiple years and are conditioned upon the continuing
availability of congressional appropriations. In addition, our U.S. government contracts generally permit the contracting
government agency to terminate the contract, in whole or in part, either for the convenience of the government or for default
based on our failure to perform under the contract.

Engineering and Product Development

Our engineering and product development programs are focused on new product introductions, enhancements of current
products, quality improvements and continuous material cost-reductions across our truck and bus product lines. We have
shifted our investment focus from engine to truck by developing driver-centric designs with world class uptime and fuel
economy that incorporates industry leading connected technologies utilizing Navistar’s OnCommand open architecture
telematics solution. In 2018, we completed the launch of the International® HV™ Series for the Severe Service segment and
the International® MV™ Series for the Medium Duty segment. These product introductions are the continuation of the vehicle
line overhaul which is the most significant product investment the Company has made in the last ten years. Additionally, we
reintroduced the IC Bus’s RE type D school bus along with an 8.0L gasoline engine in the CE Bus™. Along with Propane CE
Bus, we now have the most comprehensive powertrain offerings in the industry today. During the first six months of 2019, we
expect to complete the launch of the Horizon suite of vehicles for the Global markets. We also expect to launch a brand-new
Class 4/5 vehicle in conjunction with General Motors by the end of the calendar year. Navistar is investing in ADAS,
connected technologies and electric vehicles, working with strategic suppliers and partners. We introduced our first electric
school bus at the recent National Association for Pupil Transportation Annual Conference. We believe that the alliance with
TRATON Group will further expand our capabilities in these areas.

We participate in very competitive markets with more stringent regulatory requirements and faster technology adoptions, and
we continue to believe that our strong commitment to engineering and product development is required to drive long-term
growth. Our engineering and product development costs were $297 million in 2018, compared to $251 million in 2017 and
$247 million in 2016. We expect that greenhouse gas (“GHG”) phase 2 regulations announced in 2016 will drive significant
investments in product development by us and our competitors.

Backlog

The following table provides our worldwide backlog of unfilled truck orders as of October 31, 2018 and 2017:

As of October 31:

2018 .................................................................................................................................................
2017 .................................................................................................................................................

51,000

16,000

(in billions)
3.9
$

1.4

Units

Value

Production of our October 31, 2018 backlog is expected to be substantially completed during 2019. The backlog of unfilled
orders is one of many indicators of market demand; factors such as changes in production rates, internal and supplier available
capacity, new product introductions, and competitive pricing actions may affect point-in-time comparisons.

Employees

As our business requirements change, fluctuations may occur within our workforce from year to year. We carefully managed
our attrition, approving the replacement of key positions that we believe are critical to sustaining the improved business
performance in 2018. For more information, see Note 2, Restructurings and Impairments, to the accompanying consolidated
financial statements.

In 2018, we sold our Cherokee, Alabama facility. In addition, production at the Melrose Park, Illinois facility ceased on May
17, 2018. In 2017, we sold our Conway, Arkansas location, a components business focused on supplying parts to our Tulsa,
Oklahoma bus plant. In 2016, we sold Pure Power Technologies, LLC, a components business focused on air and fuel systems,
and our engine and foundry facilities in Indianapolis, Indiana. For more information, see Note 2, Restructurings and
Impairments, to the accompanying consolidated financial statements.

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 United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW"),
and other unions, for the periods as indicated:

Employees worldwide:

Total active employees...............................................................................................
Total inactive employees(A) ........................................................................................
Total employees worldwide ................................................................................

Total active union employees:

Total UAW .................................................................................................................
Total other unions ......................................................................................................

As of October 31,

2018

2017

2016

13,100

900

14,000

3,300

5,100

11,400

900

12,300

2,900

3,800

11,300

1,100

12,400

3,100

2,300

__________________
(A) Employees are considered inactive in certain situations including disability leave, leave of absence, layoffs, and work stoppages. Included within inactive
employees are approximately 300 employees as of October 31, 2016, represented by the National Automobile, Aerospace and Agricultural Implement
Workers of Canada ("CAW") at our Chatham, Ontario heavy truck plant, which was closed in 2011 due to an inability to reach a collective bargaining
agreement with the CAW. For more information, see Note 2, Restructurings and Impairments, to the accompanying consolidated financial statements.

See Item 1A, Risk Factors, for further discussion related to the risk associated with labor and work stoppages.

Patents and Trademarks

We seek and obtain patents on our inventions and own a significant patent portfolio. Additionally, many of the components we
purchase for our products are protected by patents that are owned or controlled by the component manufacturer. We license
third-party patents for the manufacture of our products and also grant licenses of our patents. The monetary royalties paid or
received under these licenses are not material.

Our primary trademarks are an important part of our worldwide sales and marketing efforts and provide clear identification of
our products and services in the marketplace. To support these efforts, we maintain, or have pending, registrations of our
primary trademarks in those countries in which we do business or expect to do business. We grant licenses under our
trademarks for consumer-oriented goods, such as toy trucks and apparel, outside the product lines that we manufacture. The
monetary royalties received under these licenses are not material.

Supply

We purchase raw materials, parts, and manufactured components from numerous third-party suppliers. To avoid duplicate
tooling expenses and to maximize volume benefits, single-source suppliers fill a majority of our requirements for parts and
manufactured components. Some parts and manufactured components are generic to the industry while others are of a
proprietary design requiring unique tooling, which require additional effort to relocate. However, we believe our exposure to a
disruption in production as a result of an interruption of raw materials and supplies is no greater than the industry as a whole.

Our costs for trucks and parts sold consist primarily of material costs which are influenced by commodities prices such as steel,
precious metals, resins, and petroleum products. We continue to look for opportunities to mitigate the effects of market-based
commodity cost increases through a combination of design changes, material substitution, alternate supplier resourcing, global
sourcing efforts, and hedging activities. The objective of this strategy is to ensure cost stability and competitiveness in an often
volatile global marketplace. Generally, the impact of commodity cost fluctuations in the global market will be reflected in our
financial results on a delayed basis, depending on many factors including the terms of supplier contracts, special pricing
arrangements, and any commodity hedging strategies employed.

Impact of Government Regulation

Truck and engine manufacturers continue to face significant governmental regulation of their products, especially in the areas
of environmental and safety matters, including on-highway emissions standards which require reducing allowable particulate
matter and oxides of nitrogen ("NOx"). Meeting these emissions standards resulted in a significant increase in the cost of our
products.

In 2010, the initial phase-in of onboard diagnostic ("OBD") requirements commenced for the initial family of truck engines and
those products were certified. The phase-in for the remaining engine families occurred in 2013. Canadian heavy-duty engine
emissions regulations essentially mirror those of the U.S. Environmental Protection Agency (the "EPA"). In Mexico, we offer
EPA 2004 and Euro IV engines that comply with current standards in that country. Mexico is lowering NOx emission standards
in 2019 and 2021 to Euro V and VI levels, respectively. Navistar Heavy Duty Diesel ("HDD") engines meet the EURO V and
VI with current controls technology.

Truck manufacturers are also subject to various noise standards imposed by federal, state, and local regulations. As the engine is
one of a truck's primary sources of noise, we invest a great deal of effort to develop strategies to reduce engine noise. We are

also subject to the National Traffic and Motor Vehicle Safety Act ("Safety Act") and Federal Motor Vehicle Safety Standards
("Safety Standards") promulgated by the National Highway Traffic Safety Administration ("NHTSA").

Government regulation related to climate change is under consideration at the U.S. federal and state levels. Because our
products use fossil fuels, they may be impacted indirectly due to regulation, such as a cap and trade program, affecting the cost
of fuels. The EPA and the NHTSA issued final rules for GHG emissions and fuel economy in 2011, which were fully
implemented in model year 2017. We are complying with these rules through use of existing technologies and implementation
of emerging technologies as they become available. The EPA and NHTSA adopted a final rule in October 2016 with a second
phase of federal GHG emission and fuel economy regulations. This rule contains significantly more stringent emissions levels
for engines and vehicles, which will require substantial investments of capital. The GHG emission standards in the rule will
take effect in model year 2021 and be implemented in three stages culminating in model year 2027. We continue to assess the
impact of the rule on us and our stakeholders as we develop our product planning for that period.

Canada adopted its version of fuel economy and GHG emission regulations in February 2013. These regulations are
substantially aligned with U.S. fuel economy and GHG emission regulations. Canada has finalized heavy duty phase 2 GHG
rulemaking, which is substantially similar to EPA regulations with more stringent requirements for heavy haul tractors.

In December 2014, California adopted GHG emission rules for heavy duty vehicles equivalent to EPA phase 1 rules and is in
the process of adopting its phase 2 equivalent rules. In 2014 California also adopted an optional lower emission standard for
oxides of nitrogen ("NOx") in California. California has stated its intention to lower NOx standards for California-certified
engines and has requested that the EPA lower its standards. In June 2016, several regional air quality management districts in
California and other states, as well as the environmental agencies for several states, petitioned the EPA to adopt lower NOx
emission standards for on-road heavy duty trucks and engines. In addition to lower NOx, EPA and the California Air Resources
Board ("CARB") may consider other actions, including extending emission warranty periods. On November 14, 2018 the EPA
announced the “Cleaner Trucks Initiative” which will begin the regulatory process for a reduced NOx emissions regulation
while also streamlining compliance and certification requirements. In addition to lower NOx, EPA and California may consider
other actions, including extending warranty periods, mandating sales of zero emission trucks, and requiring certification of zero
emission heavy duty vehicles. We will monitor and participate in this rulemaking. We expect that heavy duty vehicle and engine
fuel economy and GHG emissions rules will be under consideration in other global jurisdictions in the future. These standards
will require significant investments of capital, will significantly increase costs of development for engines and vehicles, and
will require us to incur administrative costs arising from implementation of the standards.

The EPA also issued a final rule in October 2015 that lowered the National Ambient Air Quality Standard for ozone to 70 parts
per billion. This rule could lead to future lower emission standards for substances that contribute to ozone, including NOx from
vehicles, at the federal and state levels.

Our facilities may be subject to regulation related to climate change, and climate change itself may also have some impact on
our operations. However, these impacts are currently uncertain and we cannot predict the nature and scope of those impacts.

Executive Officers of the Registrant

The following selected information for each of our current executive officers (as defined by regulations of the SEC) was
prepared as of November 30, 2018.

Name

Age

Position with the Company

Troy A. Clarke...................
Walter G. Borst..................
Persio V. Lisboa.................
William V. McMenamin....
Samara A. Strycker ...........
Curt A. Kramer..................

Richard E. Bond ................

Chairman, President and Chief Executive Officer

Executive Vice President and Chief Financial Officer

Executive Vice President and Chief Operating Officer

President, Financial Services and Treasurer

Senior Vice President and Corporate Controller

Senior Vice President and General Counsel

Associate General Counsel and Corporate Secretary

Troy A. Clarke has served as our President and Chief Executive Officer and as a member of our Board of Directors since April
2013 and has served as Chairman of our Board of Directors since February 2017. Mr. Clarke served as our President and Chief
Operating Officer from August 2012 to April 2013. Prior to holding these positions, Mr. Clarke served at NI as President of the
Truck and Engine Group from June 2012 to August 2012, as President of Asia-Pacific Operations of NI from 2011 to 2012, and
as Senior Vice President of Strategic Initiatives of NI from 2010 to 2011. Prior to joining NI, Mr. Clarke held various positions

at General Motors Company (“GM”), including President of GM North America from 2006 to 2009 and President of GM Asia
Pacific from 2003 to 2006. On June 1, 2009, GM filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy
Code.

Walter G. Borst has served as our Executive Vice President and Chief Financial Officer since June 2013. Prior to joining NI,
Mr. Borst served as Chairman, President and CEO of GM Asset Management and Vice President of GM since 2010. Prior to
that, Mr. Borst served as Vice President and Treasurer of GM from 2009 to 2010 and as Treasurer of GM from 2003 to 2009.
On June 1, 2009, GM filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code.

Persio V. Lisboa has served as Executive Vice President and Chief Operating Officer of NIC since March 2017. Prior to
holding this position, Mr. Lisboa served as the President, Operations of NI from November 2014 to March 2017, as Senior Vice
President, Chief Procurement Officer of NI from December 2012 to November 2014, as Vice President, Purchasing and
Logistics and Chief Procurement Officer of NI from October 2011 to November 2012 and Vice President, Purchasing and
Logistics of NI from August 2008 to October 2011. Prior to these positions, Mr. Lisboa held various management positions
within the Company’s North American and South American operations.

William V. McMenamin has served as our President, Financial Services and Treasurer since August 2015. He has also served
as President of NFC since January 2013. Mr. McMenamin served as Vice President, Chief Financial Officer and Treasurer of
NFC from October 2008 to January 2013. Prior to these positions, he served as Vice President of Strategy of NFC from May
2007 to October 2008, Vice President of Credit of NFC from April 2005 to May 2007, and Director of Corporate Finance of NI
from 2001 to 2005. Prior to joining Navistar, Mr. McMenamin held various positions in finance and accounting with a human
resources services company, a national bank and a national accounting firm.

Samara A. Strycker has served as Senior Vice President and Corporate Controller of NIC since August 2014. Prior to joining
NIC, Ms. Strycker served as Regional Controller, Americas, of General Electric Healthcare ("GE Healthcare") from July 2010
to July 2014 and prior to that position she served as Assistant Controller of GE Healthcare from September 2008 to July 2010.
Prior to joining GE Healthcare, Ms. Strycker was employed at PricewaterhouseCoopers LLP from 1993 to 2008. Ms. Strycker
is a Certified Public Accountant.

Curt A. Kramer has served as our Senior Vice President and General Counsel since April 2017. Prior to holding this position,
Mr. Kramer served as Associate General Counsel and Corporate Secretary of NI since December 2007. Prior to holding these
positions, Mr. Kramer served as General Attorney of NI from April 2007 to December 2007, Senior Counsel of NI from 2004 to
2007, Senior Attorney of NI from 2003 to 2004, and Attorney of NI from 2002 to 2003. Prior to joining NI, Mr. Kramer was in
private practice.

Richard E. Bond has served as our Associate General Counsel and Corporate Secretary since June 2017. Mr. Bond joined NI
in 2009 as Assistant General Attorney and became General Attorney and Assistant Corporate Secretary in June 2015. Prior to
joining NI, he served Monaco Coach Corporation as Senior Vice President, Secretary and Chief Administrative Officer from
1999 to 2009, Vice President, Secretary and Chief Administrative Officer from 1998 to 1999 and as Vice President, General
Counsel and Secretary from 1997 to 1998. On March 5, 2009, Monaco filed for voluntary reorganization under Chapter 11 of
the U.S. Bankruptcy Code. Prior to 1997, Mr. Bond was the senior legal officer of another recreational vehicle manufacturer,
after beginning his career in private practice.

Item 1A.

Risk Factors

Our financial condition, results of operations, and cash flows are subject to various risks, many of which are not exclusively
within our control, which may cause actual performance to differ materially from historical or projected future performance. We
have in place an Enterprise Risk Management ("ERM") process that involves systematic risk identification and mitigation
covering the categories of Strategic, Financial, Operational, and Compliance risk. The goal of ERM is not to eliminate all risk,
but rather to identify and assess risks; assign, mitigate and monitor risks; and report the status of our risks to the Management
Risk Committee and the Board of Directors and its committees. The risks described below could materially and adversely affect
our business, financial condition, results of operations, or cash flows.

We may not realize sufficient acceptance of our products in the marketplace in order to achieve our goal of regaining
market share.

Key elements of our operating strategy are to focus on our Core markets and regain market share following the transition from
our Advanced Exhaust Gas Recirculation ("EGR") only engine technology to a SCR engine technology and to pursue
innovative technologies. Our success in regaining market share depends in part on our ability to achieve market acceptance of
our existing and new products and to adapt to the swiftly emerging technologies which meet our customers' evolving needs. The
extent to which, and the rate at which, we achieve market acceptance and penetration of our current and future products is a
function of many variables including, but not limited to: price, safety, efficacy, reliability, conversion costs, competitive
pressures, regulatory approvals, marketing and sales efforts, residual values, and general economic conditions affecting
purchasing patterns. Any failure to gain and retain market share could have an adverse effect on our business, liquidity, results
of operations and financial condition.

We operate in the highly competitive North American truck market and the markets in which we compete are subject to
considerable cyclicality.

The North American truck market in which we operate is highly competitive. As a result, we and other manufacturers face
competitive pricing and margin pressures that could adversely affect our ability to increase or maintain vehicle prices. Many of
our competitors have greater financial resources, which may place us at a competitive disadvantage in responding to substantial
industry changes, such as changes in governmental regulations that require major additional capital expenditures. In addition,
certain of our competitors may have a lower overall cost structure.

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 business has significant liquidity requirements, and while recent operating results have improved our liquidity position,
the Company’s overall credit profile and the cyclicality of the industry could have an adverse impact on our liquidity
position.

Our business has significant liquidity requirements, and while our operating results over the last several years have improved
our liquidity position, the Company’s overall credit profile and the cyclicality of the industry could have an adverse impact on
our liquidity position. We believe that in the absence of significant extraordinary cash demands, our: (i) level of cash, cash
equivalents, and marketable securities, (ii) current and forecasted cash flow from our Manufacturing operations and Financial
Services operations, (iii) availability under various funding facilities, (iv) current and forecasted availability from various
funding alliances, and (v) access to capital in the capital markets will provide sufficient funds to meet operating requirements,
capital expenditures, investments, and financial obligations on both a short-term and long-term basis. Significant assumptions
underlie our beliefs with respect to our liquidity position, including, among other things, assumptions relating to North
American truck volumes for 2019, the continuing availability of trade credit from certain key suppliers, the ability to gain and
retain market share and the absence of material adverse developments in our competitive market position, access to the capital
markets or capital requirements, including the upcoming maturity of our April 2019 convertible notes. As a result, we cannot
assure you that we will continue to have sufficient liquidity to meet our operating needs. In the event that we do not have
sufficient liquidity, we may be required to seek additional capital, sell assets, reduce or cut back our operating activities or
otherwise alter our business strategy.

Our substantial indebtedness could adversely affect our financial condition, cash flow, and operating flexibility.

Our significant amount of outstanding indebtedness and the covenants contained in our debt agreements could have important
consequences for our operations. The terms of certain of our agreements limit our ability to obtain additional debt financing to
fund future working capital, acquisitions, capital expenditures, engineering and product development costs, and other general
corporate requirements; however, due to the recent refinancing transactions and amendments, we have additional incremental

debt financing capacity as compared to the restrictions contained in our previous debt agreements. Other consequences for our
operations could include:

•

increasing our vulnerability to general adverse economic and industry conditions;

limiting our ability to use operating cash flow in other areas of our business because we must dedicate a portion of these
funds to make significant interest payments on our indebtedness;

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

limiting our ability to take advantage of business opportunities as a result of various restrictive covenants in our debt
agreements; and

• placing us at a competitive disadvantage compared to our competitors that have less debt, lower interest rates and/or less

restrictive debt covenants.

Our ability to make required payments of principal and interest on our debt will depend on our future performance and the other
cash requirements of our business. Our performance, to a certain extent, is subject to general economic, political, financial,
competitive, and other factors that are beyond our control. We cannot provide any assurance that our business will generate
sufficient cash flow from operations or that future borrowings will be available under certain of our debt agreements in an
amount sufficient to enable us to service our indebtedness.

Our debt agreements contain certain restrictive covenants and customary events of default. These restrictive covenants limit our
ability to take certain actions, such as, among other things: make restricted payments; incur additional debt and issue preferred
or disqualified stock; create liens; create or permit to exist restrictions on our ability or the ability of our restricted subsidiaries
to make certain payments or distributions; engage in sale-leaseback transactions; engage in mergers or consolidations or
transfer all or substantially all of our assets; designate restricted and unrestricted subsidiaries; make certain dispositions and
transfers of assets; limit the ability of our restricted subsidiaries to make distributions; enter into transactions with affiliates; and
guarantee indebtedness. One or more of these restrictive covenants may limit our ability to execute our preferred business
strategy, take advantage of business opportunities, or react to changing industry conditions. However, the refinancing
transactions that closed in November 2017 (as discussed below) increase our flexibility in certain of the areas described above.

Upon an event of default, if not waived by our lenders, our lenders may declare all amounts outstanding as due and payable,
which may cause cross-defaults under our other debt obligations. If our current lenders accelerate the maturity of our
indebtedness, we may not have sufficient capital available at that time to pay the amounts due to our lenders on a timely basis,
and there is no guarantee that we would be able to repay, refinance, or restructure the payments on such debt. Further, under our
senior secured, term loan credit facility in an aggregate principal amount of $1.6 billion, which was refinanced in November
2017 (the "Term Loan Credit Agreement"), the $225 million Recovery Zone Facility Revenue Bonds (“Tax Exempt Bonds”)
which obtained a junior lien in November 2017 on certain of the assets that underlie the Term Loan Credit Agreement and our
amended and restated asset-based credit agreement in an aggregate principal amount of $125 million (the "Amended and
Restated Asset-Based Credit Facility"), the lenders would have the right to foreclose on certain of our assets, which could have
a material adverse effect on our Company.

Upon the occurrence of a "change of control" as specified in each of the principal debt agreements of our Manufacturing
operations, we are required to offer to repurchase or repay such indebtedness. Under these agreements, a "change of control" is
generally defined to include, among other things: (a) the acquisition by a person or group of at least 35 percent of our common
stock, or, in the case of our 4.75% senior subordinated convertible notes due April 2019 (the "2019 Convertible Notes"), 50
percent of our common stock, (b) a merger or consolidation in which holders of our common stock own less than a majority of
the equity in the resulting entity, or (c) replacement of a majority of the members of our Board of Directors by persons who
were not nominated by our current directors. Under our Amended and Restated Asset-Based Credit Facility and our Term Loan
Credit Agreement, a change in control would result in an immediate event of default, which would allow our lenders to
accelerate the debt owed to them. Under the indentures or loan agreements for our debt securities, we may be required to offer
to purchase the outstanding notes under such indentures at a premium upon a change in control. In any such event, we may not
have sufficient funds available to repay amounts outstanding under these agreements, which may also cause cross-defaults
under our other debt obligations. Further, under our Amended and Restated Asset-Based Credit Facility and our Term Loan

Credit Agreement, the lenders could have the right to foreclose on certain of our assets, which could have a material adverse
effect on our financial position and results of operations.

Past and potential downgrades in our debt ratings may adversely affect our liquidity, competitive position and access to
capital markets.

The major debt-rating agencies routinely evaluate and rate our debt according to a number of factors, among which are our
perceived financial strength and our ability to recapture market share. In May and July 2018, Moody’s, S&P and Fitch

reaffirmed our corporate rating and the ratings of all but one of our securities as the NFC senior secured bank credit facility was
upgraded by one level to B+ by Fitch. Additionally, each rating agency also changed their rating outlook from Stable to Positive
during that same period. The rating agencies have noted concerns with respect to our high levels of debt but expect continued
improvement in our credit metrics and cash flow generation. However any material deterioration in our market share recovery,
warranty expense, earnings or cash flow generation could lead to a downgrade by the rating agencies in our credit ratings. Any
downgrade in our credit ratings and any resulting negative publicity could adversely affect our continued access to trade credit
on customary terms as well as our ability to access capital in the future under acceptable terms and conditions.

Our ability to execute our strategy is dependent upon our ability to attract, train and retain qualified personnel.

Our continued success depends, in large part, on our ability to identify, attract, develop, motivate and retain qualified employees
in key functions and geographic areas. We have significant operations in foreign countries, including Canada, Mexico and
Brazil, and, to effectively manage our global operations, we will need to engage our workforce around the world throughout
their entire employee lifecycle.

In prior years we experienced the loss of certain personnel in connection with our reductions-in-force and voluntary separation
programs. In the wake of those losses, we achieved a leaner and targeted workforce while reducing and controlling costs.
However, the need to focus on engaging our workforce throughout the employee life cycle and creating sustained high
performance remains a critical focus for our organization. Failure to do so could impair our ability to execute our business
strategy and could have an adverse effect on our business prospects.

Our parts business may be negatively impacted by our engine strategy.

As a result of our decision to use third party engines in some of our products and declining units in operation due to lower
market share in recent years, we expect to experience a decline over time in our engine-related parts business revenue. In
addition, our agreement to supply diesel engines to Ford in North America ended in December 2009. A primary business
purpose of BDP is to supply aftermarket parts supporting the diesel engines supplied to Ford. We have experienced declines in
BDP’s engine-related parts sales and profitability, and we expect to see further declines as the diesel engines transition out of
service in the future.

There is inherent uncertainty in warranty estimates that may affect our operating results and cash flow.

Warranty estimates are established using historical information about the nature, frequency, timing, and average cost of
warranty claims. However, warranty claims inherently have a high amount of variability in timing and severity and can be
influenced by many external factors. We accrue warranty related costs under standard warranty terms for the trucks and
engines that we manufacture. We also accrue warranty related costs for certain claims made outside the contractual obligation
period as accommodations to our customers. In addition, with respect to our optional extended warranty contracts, we recognize
losses on defined pools of extended warranty contracts when the expected costs for a given pool of contracts exceeds the related
unearned revenues.

We have substantially reduced the number of our engine offerings which has reduced our new product warranty accruals and
potentially reduces the warranty exposure associated with engine specific service contracts over time.

In 2016 and 2017, we refreshed our truck model line-up and introduced a new big bore 13L engine under the A26 brand.
Historically, warranty claims in product launch years have been higher compared to prior model years. We continue to refine
the design and manufacturing processes to reduce the volume and severity of warranty claims. We may incur additional
charges for recalls and field campaigns to address issues as we identify opportunities to improve the design, efficiency, and
manufacturing of our products. These charges could have an adverse effect on our financial condition, results of operations and
cash flows.

We may discover defects or other issues in vehicles potentially resulting in delays in new model launches, recall campaigns,
or increased warranty costs.

Meeting or exceeding many government-mandated safety standards is costly and often technologically challenging.
Government safety standards require manufacturers to remedy defects related to motor vehicle safety through safety recall
campaigns, and a manufacturer is obligated to recall vehicles if it determines that they do not comply with a safety standard. In
addition, we may decide to take action with respect to a product issue not related to safety. Should we or government safety
regulators determine that a safety standard noncompliance, safety-related defect or other product issue exists with respect to
certain types of our vehicles, there could be a delay in the launch of a new model or a significant increase in warranty claims or
a recall for existing models, the costs of which could be substantial.

Additionally, if we experience failure in some of our emissions components and the emission component defect rates of our
engines exceed a certain level set by CARB and the EPA, those engines may be subject to corrective actions by these agencies,
which may include extending the warranties of those engines. This could increase exposure beyond the stated warranty period
to the relevant regulatory useful life of the engine, and these actions could have an adverse effect on our financial condition,
results of operations and cash flows.

We could incur restructuring and impairment charges as we continue to evaluate our portfolio of assets and identify
opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost
structure.

We continue to evaluate our portfolio of assets in order to validate their strategic and financial fit. To allow us to increase our
focus on our North American Core business, we are evaluating product lines, businesses, and engineering programs that fall
outside of our Core business. We are assessing the strategic fit to our Core business, to identify areas that are under-performing
and/or non-strategic. For under-performing and non-strategic areas, we are evaluating whether to fix, divest, or close those
areas. In addition, we are evaluating opportunities to restructure our business and rationalize our Manufacturing operations in
an effort to optimize our cost structure. These actions could result in restructuring and related charges, including but not limited
to asset impairments, employee termination costs, charges for pension and other postretirement contractual benefits, potential
additional pension funding obligations, and pension curtailments, any of which could be significant, and could adversely affect
our financial condition and results of operations.

We have substantial amounts of long-lived assets, including goodwill and intangible assets, which are subject to periodic
impairment analysis and review. Identifying and assessing whether impairment indicators exist, or if events or changes in
circumstances have occurred, including market conditions, operating results, competition, and general economic conditions,
requires significant judgment. Declines in profitability due to changes in volume, market pricing, cost, or the business
environment could result in charges that could have an adverse effect on our financial condition and results of operations.

Our Manufacturing operations are dependent upon third-party suppliers, including, in certain cases, single-source
suppliers, making us vulnerable to supply shortages.

We obtain raw materials, parts and manufactured components from third-party suppliers. Any delay in receiving supplies could
impair our ability to deliver products to our customers and, accordingly, could have an adverse effect on our business, financial
condition, results of operations, and cash flows. The volatility in the financial markets and uncertainty in the automotive sector
could result in exposure related to the financial viability of certain of our suppliers. Suppliers may also exit certain business
lines, causing us to find other suppliers for materials or components and potentially delaying our ability to deliver products to
customers, or our suppliers may change the terms on which they are willing to provide products to us, any of which could
adversely affect our financial condition and results of operations. In addition, many of our suppliers have unionized workforces
that could be subject to work stoppages as a result of labor relations issues. Some of our suppliers are the sole source for a
particular supply item (e.g., the majority of engines, parts and manufactured components) and cannot be quickly or
inexpensively re-sourced to another supplier due to long lead times and contractual commitments that might be required by
another supplier in order to provide the component or materials. In addition to the risks described above regarding interruption
of supplies, which are exacerbated in the case of single-source suppliers, the exclusive supplier of a component potentially
could exert significant bargaining power over price, quality, warranty claims or other terms relating to a component.

We are exposed to, and may be adversely affected by, interruptions to our computer and information technology systems and
sophisticated cyber-attacks.

We rely on our information technology systems and networks in connection with many of our business activities. Some of these
networks and systems are managed by third-party service providers and are not under our direct control. Our operations
routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers,
dealers, suppliers, employees and other sensitive matters. As with most companies, we have experienced cyber-attacks,
attempts to breach our systems and other similar incidents, none of which have been material. Any future cyber incidents could,
however, materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive
information; compromise personally identifiable information regarding customers or employees; and jeopardize the security of
our facilities. A cyber incident could be caused by malicious outsiders using sophisticated methods to circumvent firewalls,
encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change
frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these
techniques or to implement adequate preventative measures. Information technology security threats, including security
breaches, computer malware and other cyber-attacks are increasing in both frequency and sophistication and could create
financial liability, subject us to legal or regulatory sanctions or damage our reputation with customers, dealers, suppliers and
other stakeholders. We continuously seek to maintain a robust program of information security and controls, but the impact of a

material information technology event could have a material adverse effect on our competitive position, reputation, results of
operations, financial condition and cash flows.

We have significant underfunded postretirement obligations.

On a U.S. generally accepted accounting principles ("GAAP") basis, the underfunded portion of our projected benefit
obligation was $1.2 billion and $1.4 billion for pension benefits at October 31, 2018 and 2017, respectively, and $0.9 billion
and $1.1 billion for postretirement healthcare benefits at October 31, 2018 and 2017, respectively. In calculating these amounts,
we have assumed certain mortality rates, interest rates and growth rates of retiree medical costs. The fair value of invested
assets held in our postretirement benefit plans are measured at October 31 each year and are used to compute funded status.
Future mortality assumption changes and growth rates of retiree medical costs actually experienced by the postretirement
benefit plans, as well as reductions in interest rates and the investment performance of the assets, could have an adverse impact
on our underfunded postretirement obligations, financial condition, results of operations and cash flows.

The continued restructuring and rationalization of our business could also accelerate our pension funding obligations under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The volatility in the financial markets affects the
valuation of our pension assets and liabilities, resulting in potentially higher pension costs and higher levels of under-funding in
future periods. The requirements set forth in ERISA and the Internal Revenue Code of 1986, as amended (the "IRC"), as
applicable to our U.S. pension plans (including timing requirements) mandated by the Pension Protection Act of 2006 (the
"PPA") to fully fund our U.S. pension plans, net of any current or possible future legislative or governmental agency relief,
could also have an adverse impact on our business, financial condition, results of operations and cash flows even though the
pension funding relief legislation, Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010,
the Moving Ahead for Progress in the 21st Century Act ("MAP-21 Act") and the Highway and Transportation Funding Act of
2014 ("HATFA") and the Bi-Partisan Budget Act of 2015, will reduce our funding requirements over the next four years.

Implementation of our emissions strategy, federal regulations and fuel economy rules may increase costs.

Recent and future changes to on-highway emissions or performance standards (including fuel efficiency, noise, and safety), as
well as compliance with additional environmental requirements, are expected to continue to add to the cost of our products and
increase the engineering and product development programs of our business. Implementation of our emissions strategy is
ongoing and we may experience increased costs or compliance or timing risks as we continue implementation of OBD systems
requirements as they phase in and manage GHG emission credit balances. The EPA, the U.S. Department of Transportation and
the government of Canada have issued final rules on GHG emissions and fuel economy for medium and heavy duty vehicles
and engines. The emission standards establish required minimum fuel economy and GHG emissions levels for both engines and
vehicles primarily through the increased use of existing technology. The rules, which apply to our engines and vehicles, initially
required EPA certification for vehicles and engines to GHG emissions standards in calendar year 2014 and were fully
implemented in model year 2017. EPA and NHTSA adopted a second phase of GHG emissions reductions that will apply in
three emission standards beginning in model year 2021 and culminating in model year 2027. These rules reduce emission levels
for engines and vehicles. In addition, California has adopted GHG emissions standards for heavy duty vehicles and engines,
stated its intention to lower NOx standards for California certified engines and requested EPA to lower NOx emission standards
as well. In addition to lower NOx, EPA and California may consider other actions, including extending warranty periods,
mandating sales of zero emission trucks, and requiring certification of zero emission heavy duty vehicles. In addition, we are
responsible for emission certification for certain partner companies which can introduce complexity into the certification
process.

These standards will require significant investments of capital, will significantly increase costs of development for engines and
vehicles, and will require us to incur administrative costs arising from implementation of the standards. These regulatory
proposals under consideration or those that are proposed in the future may set standards that are difficult to achieve or adversely
affect our results of operations due to increased research, development, and warranty costs.

Our business may be adversely impacted by work stoppages and other labor relations matters.

We are subject to risk of work stoppages and other labor relations matters because a significant portion of our workforce is
unionized. As of October 31, 2018, approximately 8,200 of our hourly workers and approximately 700 of our salaried workers
were represented by labor unions and were covered by collective bargaining agreements. Many of these agreements include
provisions that limit our ability to realize cost savings from restructuring initiatives such as plant closings and reductions in
workforce. Our current master collective bargaining agreement with the United Automobile, Aerospace and Agricultural
Implement Workers of America ("UAW") expired in October 2018 and we are currently in negotiations with the UAW to enter
into a new collective bargaining agreement.

Any strikes, threats of strikes, arbitration or other resistance in connection with the negotiation of new labor agreements, or
increases in costs under a newly negotiated labor agreement, could adversely affect our business as well as impair our ability to
18

implement further measures to reduce structural costs and improve production efficiencies. A lengthy strike that involves a
significant portion of our manufacturing facilities could have an adverse effect on our financial condition, results of operations,
and cash flows.

We are involved in pending litigation, and an adverse resolution of such litigation may adversely affect our business,
financial condition, and 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 an adverse effect on our business, financial condition, and results of operations or cash
flows.

We are currently involved in a number of pending litigation matters. For additional information regarding certain lawsuits in
which we are involved, see Note 13, Commitments and Contingencies, to our consolidated financial statements.

A small number of our stockholders have significant influence over our Board of Directors.

In October 2012, we entered into settlement agreements with two of our significant stockholders, Carl C. Icahn and several
entities controlled by him (collectively, the "Icahn Group") and Mark H. Rachesky, MD, and several entities controlled by him
(collectively, the "MHR Group") pursuant to which the Icahn Group and the MHR Group each had one representative
appointed to our Board of Directors, and together the Icahn Group and the MHR Group mutually agreed upon a third
representative appointed to our Board of Directors. In July 2013, we entered into amended settlement agreements with the
Icahn Group and the MHR Group pursuant to which the Icahn Group and the MHR group each had two representatives
nominated for election as directors at our 2014 annual meeting, and each has continued to have two representatives nominated
for election each year. On September 5, 2016, we entered into a Stockholder Agreement with TRATON Group which, among
other things, provides for the appointment of two individuals designated by TRATON Group to our Board of Directors, subject
to our approval, and on February 28, 2017, we appointed the two individuals designated by TRATON Group to our Board of
Directors. As of October 31, 2018, based on filings made with the SEC and other information made available to us as of that
date, we believe that: (i) the Icahn Group held approximately 16.7 million shares, or 16.9% of our outstanding common stock,
(ii) the MHR Group held approximately 16.3 million shares, or 16.5% of our outstanding common stock, (iii) TRATON Group
held approximately 16.6 million shares, or 16.8% of our outstanding common stock, and (iv) the Icahn Group, the MHR Group,
TRATON Group, and two other stockholders, collectively hold approximately 70% of our outstanding common stock.

As a result of the foregoing, these stockholders are able to exercise significant influence over the election of our Board of
Directors as well as matters requiring stockholder approval. Further, this concentration of ownership may adversely affect the
market price of our common stock.

Provisions in our charter and by-laws, and Delaware law could delay and discourage takeover attempts that stockholders
may consider favorable.

Certain provisions of our certificate of incorporation and by-laws, and applicable provisions of Delaware corporate law, may
make it more difficult for a third party to acquire control of us or change our Board of Directors and management, or may
prevent such acquisition or change. These provisions include:

•

the ability of our Board of Directors to issue so-called "flexible" preferred stock;

• a provision for any vacancies on our Board of Directors to be filled only by the remaining directors;

•

the inability of stockholders to act by written consent or call special meetings;

• advance notice procedures for stockholder proposals to be brought before an annual meeting of our stockholders; and

• Section 203 of the Delaware General Corporation Law, which generally restricts us from engaging in certain business

combinations with a person who acquires 15% or more of our common stock for a period of three years from the date such
person acquired such common stock, unless stockholder or Board approval is obtained prior to the acquisition

The foregoing provisions may adversely affect the marketability of our common stock by discouraging potential investors from
acquiring our stock. In addition, these provisions could delay or frustrate the removal of incumbent directors and could make
more difficult a merger, tender offer or proxy contest involving us, or impede an attempt to acquire a significant or controlling
interest in us, even if such events might be beneficial to us and our stockholders.

We must comply with numerous federal security laws, procurement regulations, 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, Defense Federal Acquisition Regulation Supplement, foreign government procurement regulations
and the industrial security regulations of the Department of Defense and related laws include provisions that:

• 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. Departments of State, Commerce and Defense and other federal
agencies that are designed to safeguard against foreigners' access to classified or restricted information. Similarly, our
international operations are subject to the rules and regulations of foreign jurisdictions. If we were to come under foreign
ownership, control or influence, we could lose our facility security clearances, which could result in our federal government
clients terminating or deciding not to renew our contracts and could impair our ability to obtain new contracts.

A failure to comply with applicable laws, regulations, policies or procedures, including federal regulations regarding the
procurement of goods and services and protection of classified information, could result in contract termination, loss of security
clearances, suspension or debarment from contracting with the federal government, civil fines and damages and criminal
prosecution and penalties, any of which could adversely affect our business.

Our products are subject to export limitations and we may be prevented from shipping our products to certain nations or
buyers.

We are subject to federal licensing requirements with respect to the sale and support in foreign countries of certain of our
products and the exporting of components for our products in foreign countries. In addition, we are obligated to comply with a
variety of federal, state and local laws and regulations as well as procurement policies, both domestically and abroad, governing
certain aspects of our international sales and support, including regulations promulgated by, among others, the U.S.
Departments of Commerce, Defense, State and Justice.

Such licenses may be denied for reasons of U.S. national security or foreign policy. In the case of certain large orders for
exports of defense equipment, the Department of State must notify Congress at least 15 to 30 days, depending on the size and
location of the sale, prior to authorizing certain sales of defense equipment and services to foreign governments. During that
time, Congress may take action to block the proposed sale. We can give no assurances that we will continue to be successful in
obtaining the necessary licenses or authorizations or that Congress will not prevent or delay certain sales. Any significant
impairment of our ability to sell products outside of the U.S. could negatively impact our financial condition, results of
operations and cash flows.

For products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, we are subject to U.S. laws,
sanctions, embargoes, and regulations governing international trade and exports, including, but not limited to, International
Traffic in Arms Regulations, Export Administration Regulations, the Foreign Sales program and the Office of Foreign Assets
Control, U.S. Department of the Treasury. A determination by the U.S. government that we have failed to comply with one or
more of these export controls or trade sanctions could result in civil or criminal penalties, including the imposition of
significant fines, denial of export privileges, loss of revenues from certain customers, and debarment from participation in U.S.
government contracts.

We are subject to the Foreign Corrupt Practices Act (the "FCPA") and other laws which prohibit improper payments to foreign
governments and their officials by U.S. and other business entities. We operate in countries known to experience corruption.
Our operations in such countries create the risk of an unauthorized payment by one of our employees or agents that could be in
violation of various laws including the FCPA.

Additionally, the failure to obtain applicable governmental licenses, clearances, or approvals could adversely affect our ability
to continue to service the government contracts we maintain. Exports of some of our products to certain international
destinations may require shipment authorization from U.S. export control authorities, including the U.S. Departments of
Commerce and State, and authorizations may be conditioned on end-use restrictions.

Our international business is also highly sensitive to changes in foreign national priorities and government budgets. Sales of
military products are affected by defense budgets (both in the U.S. and abroad) and U.S. foreign policy.

Our operations are subject to environmental, health and safety laws and regulations that could result in liabilities to us.

Our operations are subject to environmental, health and safety laws and regulations, including those governing discharges to air
and water; the management and disposal of hazardous substances; the cleanup of contaminated sites; and health and safety
matters. We could incur material costs, including cleanup costs, civil and criminal fines, penalties and third-party claims for
cost recovery, property damage or personal injury as a result of violations of or liabilities under such laws and regulations.
Contamination has been identified at and in the vicinity of some of our current and former properties and at properties which
received wastes from current or former Company locations for which we have established financial reserves. The ultimate cost
of remediating contaminated sites is difficult to accurately predict and could exceed our current estimates. In addition, as
environmental, health, and safety laws and regulations have tended to become stricter, we could incur additional costs
complying with requirements that are promulgated in the future. These include climate change regulation, which could increase
the cost of operations through increased energy costs.

We may not achieve all of the expected benefits from our cost saving initiatives.

We have implemented a number of cost saving initiatives, including the consolidation of our North American truck and engine
engineering operations, continued reductions in discretionary spending, and employee headcount reductions. In addition, we
continue to evaluate additional options to improve the efficiency and performance of our operations. This includes evaluating
our portfolio of assets, which could include closing or divesting non-core/non-strategic businesses, and identifying
opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost
structure. We have made certain assumptions in estimating the anticipated impact of our cost saving initiatives, which include
the estimated savings from the elimination of certain open positions. These assumptions may turn out to be incorrect due to a
variety of factors. In addition, our ability to realize the expected benefits from these initiatives is subject to significant business,
economic and competitive uncertainties and contingencies, many of which are beyond our control. Some of our cost saving
measures may not have the impact on our profitability that we currently project or we may not be able to sustain the savings. If
we are unsuccessful in implementing these initiatives or if we do not achieve our expected results, our results of operations and
cash flows could be adversely affected.

We may not achieve all of the expected benefits from our acquisitions, joint ventures, or strategic alliances.

We cannot provide any assurances that our acquisitions, joint ventures, or strategic alliances will generate all of the expected
benefits, including the cost savings and strategic advantages that are anticipated from the strategic alliance with TRATON
Group. In addition, we cannot assure you that disputes will not arise with our joint venture partners and that such disputes will
not lead to litigation or otherwise have an adverse effect on the joint ventures or our relationships with our joint venture
partners. Failure to successfully manage and integrate these acquisitions, joint ventures, and strategic alliances could adversely
impact our financial condition, results of operations and cash flows. We continue to evaluate opportunities to further restructure
our business in an effort to optimize our cost structure, which could include, among other actions, additional rationalization of
certain of our acquisitions, joint ventures, or strategic alliances.

We are exposed to political, economic, and other risks that arise from operating a multinational business.

We have significant operations in foreign countries, primarily in Canada, Mexico and Brazil. Accordingly, our business is
subject to the political, economic, and other risks that are inherent in operating a multinational company. These risks include,
among others:

•

trade protection measures and import or export licensing requirements;

the imposition of foreign withholding taxes on the remittance of foreign earnings to the U.S.;

• difficulty in staffing and managing international operations and the application of foreign labor regulations;

• multiple and potentially conflicting laws, regulations, and policies that are subject to change;

• currency exchange rate risk; and

• changes in general economic and political conditions in countries where we operate, particularly in emerging markets.

Our ability to use net operating loss ("NOL") carryovers to reduce future tax payments could be negatively impacted if there
is a change in our ownership or a failure to generate sufficient taxable income.

As of October 31, 2018, we had $2.7 billion of NOL carryforwards with which to offset our future taxable income for U.S.
federal income tax reporting purposes. Presently, there is no annual limitation on our ability to use U.S. federal NOLs to reduce
21

future income taxes. However, we may be subject to substantial annual limitations provided by the IRC if an "ownership
change," as defined in Section 382 of the IRC, occurs with respect to our capital stock. Generally, an ownership change occurs
if certain persons or groups increase their aggregate ownership by more than 50 percentage points of our total capital stock in a

three-year period. If an ownership change occurs, our ability to use domestic NOLs to reduce taxable income is generally
limited to an annual amount based on (i) the fair market value of our stock immediately prior to the ownership change
multiplied by the long-term tax-exempt interest rate plus (ii) under certain circumstances, realized built-in gains on certain
assets held prior to the ownership change for the first five years after the ownership change. Although NOLs that exceed the
Section 382 limitation in any year continue to be allowed as carryforwards for the remainder of the 20-year carryforward period
and can be used to offset taxable income for years within the carryover period subject to the limitation in each year, the use of
the remaining NOLs for the loss year will be prohibited if the carryover period for any loss year expires. If we should fail to
generate a sufficient level of taxable income prior to the expiration of the NOL carryforward periods, then we will lose the
ability to apply the NOLs as offsets to future taxable income. Similar limitations also apply to certain U.S. federal tax credits.
As of October 31, 2018, we had $197 million of U.S. federal tax credits that would be subject to a limitation upon a change in
ownership with carryforward periods of up to 20 years.

U.S. federal income tax reform could adversely affect us.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act") was signed into U.S. law, significantly reforming the
IRC. The Tax Act, among other things, includes a reduction to the statutory corporate income tax rate from 35% to 21%, effective
January 1, 2018; a mandatory inclusion in taxable income for the deemed repatriation of earnings of the Company’s foreign
subsidiaries; changes to limits on the deductions for executive compensation and interest expense; a tax on global intangible low
taxed income; a base erosion anti
abuse tax; and a deduction for foreign derived intangible income. The changes attributable to
the Tax Act are complex and subject to additional guidance to be issued by the U.S. Treasury and the Internal Revenue Service.
In addition, the reaction to the federal tax changes by the individual states is evolving. While we continue to examine the impact
the Tax Act may have on our business, the overall impact of the Tax Act is uncertain, and our business and financial condition
could be adversely affected. The estimated impact of the Tax Act is based on our management’s current knowledge and assumptions
and recognized impacts could be materially different from current estimates based on our actual results and our further analysis
of the new law.

New tariffs and evolving trade policy between the United States and other countries, including China, may have an adverse
effect on our business and results of operations.

We have a global supply chain of material costs for trucks and parts sold. Recent steps taken by the United States government
to apply and consider applying tariffs on certain products and materials, including steel, could potentially disrupt our existing
supply chains and impose additional costs on our business, including costs with respect to raw materials upon which our
business depends. The increased costs may negatively impact our margins as we may not be able to pass on the additional costs
by increasing the prices of our products. As a result, we continue to monitor these tariffs and the evolving trade policy of the
United States and are actively looking for opportunities to mitigate their effects through a combination of design changes,
material substitution, and alternate supplier resourcing. While we believe
our exposure to the potential increased costs of these tariffs is no greater than the industry as a whole, our business and results
of operations may be adversely affected if our efforts to mitigate their effects are unsuccessful.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Our Truck segment operates five manufacturing and assembly facilities, which contain in the aggregate approximately five
million square-feet of floor space. Of these five facilities, four are located in the U.S. and one is located in Mexico. Three
facilities are owned and two facilities are subject to leases. Four plants manufacture and assemble trucks, buses, and chassis.
One plant is used to build diesel engines.

Our Parts segment leases six distribution centers in the U.S., two in Canada, one in Mexico, and one in South Africa.

Our Global Operations segment owns and operates 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.

Our Financial Services segment, the majority of whose activities are conducted at our headquarters in Lisle, Illinois, also leases
office space in Mexico.

Our principal product development and engineering facilities are currently located in Lisle, Illinois; Melrose Park, Illinois;
Madison Heights, Michigan; New Carlisle, Indiana; and Monterrey, Mexico. Additionally, we own or lease other significant
properties in the U.S., Canada and Mexico including vehicle and parts distribution centers, sales offices, and our headquarters
in Lisle, Illinois. Not included above is the Waukesha, Wisconsin foundry which was leased to a third party in April 2015, the
rail car manufacturing plant that was exited in February 2018 and the Melrose Park Engine Plant whose operations ceased in
May 2018.

We believe that all of our facilities have been adequately maintained, are in good operating condition, and are suitable for our
current needs. These facilities, together with planned capital expenditures, are expected to meet our needs in the foreseeable
future. Our Lisle, Illinois and Brookfield, Wisconsin, properties are subject to mortgages in favor of the lenders under our Term
Loan Credit Agreement.

Item 3.

Legal Proceedings

The information required to be set forth under this heading is incorporated by reference from Note 13, Commitments and
Contingencies, to the Consolidated Financial Statements included in Part II, Item 8.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Securities

Market Information

Our common stock is listed on the New York Stock Exchange ("NYSE"), under the stock symbol "NAV."

Number of Holders

As of November 30, 2018, there were approximately 6,464 holders of record of our common stock.

Dividend Policy

Holders of our common stock are entitled to receive dividends when and as declared by the Board of Directors out of funds
legally available therefore, provided that, so long as any shares of our preference stock are outstanding, no dividends (other
than dividends payable in common stock) or other distributions (including purchases) may be made with respect to the common
stock unless full cumulative dividends, if any, on our shares of preference stock have been paid. Under the General Corporation
Law of the State of Delaware, dividends may only be paid out of surplus or out of net profits for the year in which the dividend
is declared or the preceding year, and no dividend may be paid on common stock at any time during which the capital of
outstanding preference stock exceeds our net assets. Certain debt instruments contain terms that include negative covenants and
restrictions, including, among others, certain limitations on dividends. We have not paid dividends on our common stock since
1980.

Recent Sales of Unregistered Securities

There were no sales of unregistered securities by us or affiliates during the three months ended October 31, 2018.

Purchases of Equity Securities

There were no purchases of equity securities by us or affiliates during the three months ended October 31, 2018.

Stock Performance

The following graph compares the five-year cumulative total returns of Navistar International Corporation common stock, the
S&P 500 Index, and the S&P Construction, Farm Machinery and Heavy Truck Index.

The comparison graph assumes $100 was invested on October 31, 2013 in our common stock and in each of the indices shown
and assumes reinvestment of all dividends. Data is complete through October 31, 2018. Shareholder returns over the indicated
period are based on historical data and should not be considered indicative of future shareholder returns.

Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
October 2018

180.00

160.00

140.00

120.00

100.00

80.00

60.00

40.00

20.00

2013

2014

2015

2016

2017

2018

Navistar International Corp.

S&P 500 Index - Total Returns

S&P 500 Construction & Farm Machinery & Heavy Truck Index

2013

2014

2015

2016

2017

2018

As of October 31,

Navistar International Corporation ............................................. $
S&P 500 Index - Total Returns...................................................
S&P Construction, Farm Machinery, and Heavy Truck Index ...

100
100
100

98
117
118

34
123
87

62
129
104

117
159
160

93
171
139

The above graph uses peer group only performance (excludes us from the peer group). Peer group indices use beginning of periods' market capitalization
weighting. Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2018. Index Data: Copyright Standard and
Poor’s, Inc. Used with permission. All rights reserved.

Item 6.

Selected Financial Data

Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the notes to the
accompanying consolidated financial statements for additional information regarding the financial data presented below,
including matters that might cause this data not to be indicative of our future financial condition or results of operations.

Five-Year Summary of Selected Financial and Statistical Data

As of and for the Years Ended October 31,

2017

2016

2015

2014

8,570
64
(10)
54
1
55
25

8,111
(32)
(33)
(65)
—
(65)
32

$ 10,140 $ 10,806
(556)
(26)
(582)
3
(579)
40

(103)
(51)
(154)
3
(151)
33

(97) $

(184) $

(619)

29
1
30

0.31
0.01
0.32

93.0
93.5

6,135

3,121
768
3,889

(97) $
—
(97) $

(1.19) $
—
(1.19) $

81.7
81.7

5,653

3,025
972
3,997

(187) $
3
(184) $

(2.29) $
0.04
(2.25) $

81.6
81.6

(622)
3
(619)

(7.64)
0.04
(7.60)

81.4
81.4

6,649 $

7,392

3,059 $
1,088
4,147 $
— $

2,814
1,065
3,879
2

$
— $

340
—
340

3.44
—
3.44

3.41
—
3.41

98.9
99.6

7,230

2,965
1,556
4,521

2018

(in millions, except per share data)
RESULTS OF OPERATIONS DATA
Sales and revenues, net ............................................................... $ 10,250
420
Income (loss) from continuing operations before taxes .............
(52)
Income tax expense.....................................................................
368
Income (loss) from continuing operations..................................
—
Income from discontinued operations, net of tax .......................
368
Net income (loss)........................................................................
28
Less: Net income attributable to non-controlling interests.........
Net income (loss) attributable to Navistar International
Corporation ................................................................................. $
Amounts attributable to Navistar International Corporation
common shareholders:
Income (loss) from continuing operations net of tax.................. $
Income from discontinued operations, net of tax .......................

340

Net income (loss)................................................................. $

Basic earnings (loss) per share

Continuing operations ......................................................... $
Discontinued operations ......................................................

Net income (loss) ......................................................... $

Diluted earnings (loss) per share

Continuing operations ......................................................... $
Discontinued operations ......................................................

Net income (loss) ......................................................... $

Weighted average number of shares outstanding:

Basic ....................................................................................
Diluted .................................................................................

BALANCE SHEET DATA
Total assets.................................................................................. $
Long-term debt:(A)

Manufacturing operations.................................................... $
Financial services operations...............................................
Total long-term debt ............................................................ $
Redeemable equity securities ..................................................... $

___________________________
(A) Exclusive of current portion of long-term debt.

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide
information that is supplemental to, and should be read together with, our consolidated financial statements and the
accompanying notes. Information in MD&A is intended to assist the reader in obtaining an understanding of (i) our
consolidated financial statements, (ii) the changes in certain key items within those financial statements from year-to-year,
(iii) the primary factors that contributed to those changes, (iv) any changes in known trends or uncertainties that we are aware
of and that may have a material effect on our future performance, and (v) how certain accounting principles affect our
consolidated financial statements. In addition, MD&A provides information about our business segments and how the results of
those segments impact our results of operations and financial condition as a whole.

Executive Overview

We are an international manufacturer of International® brand commercial and military trucks, proprietary brand diesel engines,
and IC Bus® ("IC") brand school and commercial buses, as well as a provider of service parts for trucks and diesel engines.
Our Core business is conducted in the North American truck and parts markets, where we principally participate in the U.S. and
Canada school bus and Class 6 through 8 medium and heavy truck markets. We also provide retail, wholesale, and lease
financing services for our trucks and parts.

Executive Summary

During 2018, we continued to take actions that we believe will improve our performance. Going forward, our strategic vision
includes areas of focus around being customer-centric, driving operational excellence, focusing on our Core business, pursuing
business transformation, leveraging our alliance with TRATON Group, and promoting cross-functional teamwork with a
winning culture. We believe our strategy will enable us to build upon our accomplishments and become the number one choice
and the most customer focused, innovative and value driven truck and bus solution provider in the Americas.

In November 2017, we issued $1.1 billion in aggregate principal amount of 6.625% senior notes due 2026 (“6.625% Senior
Notes”) and signed a definitive Term Loan Credit Agreement relating to a seven-year senior secured term loan credit facility in
an aggregate principal amount of $1.6 billion. The proceeds from the offering of our 6.625% Senior Notes were used to
purchase a portion of our previously existing 8.25% Senior Notes and to pay accrued and unpaid interest thereon, and pay the
associated prepayment premiums, certain transaction fees and expenses incurred in connection with the 6.625% Senior Notes. A
portion of the proceeds from our Term Loan Credit Agreement were used to repay all outstanding loans under our previously
existing Senior Secured Term Loan Credit Facility (the “Term Loan"), to pay accrued and unpaid interest thereon, and pay
certain transaction fees and expenses incurred in connection with the new Term Loan Credit Agreement, and to repurchase the
remaining outstanding 8.25% Senior Notes and associated accrued but unpaid interest thereon. The remainder of the proceeds
of the Term Loan Credit Agreement will be used for ongoing working capital purposes and general corporate purposes.

In November 2017, we entered into the First Amendment to Loan Agreement with The County of Cook, Illinois and the First
Amendment to Loan Agreement with the Illinois Finance Authority (“Tax Exempt Bond Amendments”) to adjust various
restrictive covenants included in the loan agreements relating to the Tax Exempt Bonds, including to permit the Company to
incur secured debt of up to $1.7 billion, in exchange for a coupon increase from 6.50% to 6.75% and the grant of a junior
priority lien on certain collateral securing the Company's previously existing Term Loan and the new Term Loan Credit
Agreement.

In July 2018, NFC entered into a new agreement whereby NFC borrowed an aggregate principal amount of $400 million under
a new seven-year senior secured term loan facility (the "NFC Term Loan"). The proceeds of the NFC Term Loan were used to
pay certain fees and expenses in connection with the NFC Term Loan and to make an intercompany loan of $150 million to our
Manufacturing operations. The remainder of the proceeds of the NFC Term Loan will be used for other general NFC purposes.

In October 2018, we repaid in full our 4.5% Senior Subordinated Convertible Notes issued in October 2013. The repayment of
the outstanding principal of $200 million at maturity was funded with cash on hand.

In November 2018, we entered into a definitive agreement with Cerberus Capital Management, L.P. and its affiliates
(“Cerberus”) to sell a 70% equity interest in our defense business, Navistar Defense, LLC (“Navistar Defense”), for a total
value of approximately $140 million, adjusted for certain current year chargeouts. The total value is subject to additional
adjustments related to working capital, the transfer of certain liabilities and commitments, and other items. The agreement also
includes an exclusive long term supply agreement for commercial parts and chassis. The transaction is subject to customary
closing conditions, including regulatory clearances. We expect the transaction to close in the first quarter of 2019.

We remain committed to product investment to increase customer value and to focus on our Core markets. In January 2018, we
announced the launch of the International® HV™ Series Mid-Range Diesel which includes a bridge formula truck for the
concrete industry. In February 2018, we announced the launch of the newly updated IC Bus® RE Series Type D school bus
featuring remote diagnostics connectivity solutions. In March 2018, we announced the launch of the International® MV™
Series Mid-Range Diesel model, our new medium-duty truck. In November 2018, we announced the launch of the
International® CV™ Series, our new class 4/5 truck. With our strategic partner, TRATON Group, we believe we will have a
fully integrated proprietary powertrain starting in 2020. We expect to launch an electric medium-duty truck and electric school
bus in 2020. We also expect to launch a next generation connectivity module allowing feature sharing.

2018 Financial Summary

Continuing Operations Results

Continuing Operations Results — Consolidated net sales and revenues were $10.3 billion in 2018, an increase of 20%
compared to 2017. The increase primarily reflects higher volumes in our Core markets.

In 2018, we earned income from continuing operations before income taxes of $420 million compared to $64 million in 2017.
Our gross margin increased by $400 million primarily due to the impact of higher volumes and a decrease in used truck losses.
Also, during 2018, we recorded a gain of $70 million representing the net present value of our recovery from the Deepwater
Horizon Settlement Program in Other Income, net and $46 million of charges related to the extinguishment of unamortized debt
issuance costs and tender premium payments associated with the repurchase of our 8.25% Senior Notes and refinancing of our
previous Term Loan.

In 2018, we recognized income tax expense from continuing operations of $52 million, compared to income tax expense of $10
million in the prior year. Income tax expense in both periods was impacted by earnings, geographical mix and certain discrete
items. The change in income tax expense was also impacted by a $28 million intraperiod allocation benefit in domestic
continuing operations due to certain post retirement plan remeasurements and a release of various state uncertain tax position
liabilities of $14 million, both recorded in 2017.

In 2018, after income taxes, income from continuing operations attributable to NIC was $340 million, or $3.41 per diluted
share, compared to income of $29 million, or $0.31 per diluted share, in 2017.

In 2018, consolidated net income from continuing operations attributable to Navistar International Corporation ("NIC"), before
manufacturing interest, taxes, depreciation and amortization expenses (“EBITDA”) was $838 million, compared to EBITDA of
$527 million in 2017. Excluding certain net adjustments of $12 million and $55 million in 2018 and 2017, respectively,
Adjusted EBITDA was $826 million in 2018 compared to $582 million in 2017. EBITDA and Adjusted EBITDA are not
determined in accordance with U.S. GAAP, nor are they presented as alternatives to U.S. GAAP measures. For more
information regarding this non-GAAP financial information, see Consolidated EBITDA and Adjusted EBITDA.

We ended the year 2018 with $1,421 million of consolidated cash, cash equivalents and marketable securities, compared to
$1,076 million as of October 31, 2017. The increase in consolidated cash, cash equivalents and marketable securities was
primarily attributable to net income, increases in accounts payable and other current and noncurrent liabilities, proceeds from
the sales of property and equipment, financed lease obligations and the issuance of long-term and securitized debt partially
offset by increases in accounts and finance receivables, inventory and other noncurrent assets, capital expenditures, purchases
of equipment leased to others, and payments on securitized and long-term debt and dividends paid with respect to non-
controlling interests.

Business Outlook and Key Trends

We continually look for ways to improve the efficiency and performance of our operations, and our focus is on improving our
Core businesses. Certain trends have affected our results of operations for 2018 as compared to 2017 and 2016. These trends, as
well as the key trends that we expect will impact our future results of operations, are as follows:

• Engine Strategy and Emissions Standards Compliance—We are focused on new product introductions, enhancements of

current products, quality improvements and continuous material cost-reductions across our truck and bus product lines. We
have shifted our investment focus from engines to trucks including developing driver-centric designs. We are also
expanding our powertrain offerings with a mix of proprietary engines and Cummins engines. We have incurred significant
research and development and tooling costs to design and produce our product lines to meet the EPA and CARB on-
highway HDD emissions standards, including OBD requirements. GHG phase 2 regulations will further drive up
significant investments in product development by us and our competitors. CARB also continues to advocate for stricter
emission standards, OBD requirements and in-use oversight. These emissions standards have and will continue to result in
significant increases in the costs of our products.

•

TRATON Group Alliance—We and TRATON Group have a similar vision for the role of technology, including the
importance of driver-focused open architecture solutions. We expect the alliance will be a source of powertrain options
and other high-value technologies, including advanced driver assistance systems, connected vehicle solutions including
platooning and autonomous technologies, electric vehicles, and cab and chassis subsystems. We expect to have a fully
integrated proprietary powertrain starting in 2020, launch the next generation connectivity module allowing feature
sharing, and launch an electric medium-duty truck and electric school bus as early as 2020.

• Core Truck Market—The Core truck market in which we compete are cyclical in nature and are strongly influenced by
macroeconomic factors such as industrial production, demand for durable goods, construction spending, business
investment, oil prices, and consumer confidence and spending. Class 8 industry volume in 2018 increased 34% over 2017,
and we anticipate positive momentum will continue in 2019 as general economic and industry-specific indicators are
trending well into the next year. In addition, improved new truck fuel economy along with solid freight demand and rates
show the trucking industry remains healthy. However, supplier capacity constraint and driver shortage may continue to
negatively impact Class 8 truck demand. The medium truck and school bus markets are expected to maintain strong
demand in 2019. We anticipate that our Core market retail industry deliveries will range between 395,000 units to 425,000
units for 2019.

• Used Truck Inventory—Our gross used truck inventory decreased to approximately $154 million at October 31, 2018 from
$206 million at October 31, 2017, offset by reserves of $31 million and $110 million, respectively. During 2018, additions
to our used truck reserves were $50 million, compared to $111 million and $187 million in 2017 and 2016, respectively.
The decline was primarily due to the implementation of a shift in market mix in 2017 for our used trucks to include an
increase in volume to certain export markets that have a lower price point as compared to sales through our domestic
channels, and to lower domestic pricing to enable higher sales velocity. We have decreased our gross used truck inventory
balances and inventory reserves as a result of the shift in market mix and change in pricing strategy. We continue to seek
alternative channels to sell our used trucks.

• Parts—The Parts business remains a significant source of revenue and profit. We are focusing on retail customer

segmentation and improving dealer-lead generation. Our private label brands help provide All-Make parts to customers,
attract incremental price sensitive customers, and offset the decline in late-in-lifecycle products. We are leveraging
technology such as eCommerce to attract and retain new customers, to expand our existing customers’ portfolio of
products, and to improve the ease of doing business. We have embraced improving uptime via parts availability, dedicated
same-day deliveries and expanded hours at our parts distribution centers.

• Navistar Defense Sales—Our Navistar Defense sales were $534 million in 2018, compared to $302 million in 2017 and
$252 million in 2016. The 2018 Navistar Defense sales primarily consisted of refurbishment and upgrades of MaxxPro
vehicles to “like new” condition for foreign militaries, deliveries of military commercial off the shelf variants
("MILCOTS") and new MaxxPro vehicles to foreign militaries, spare parts, and technical support service.

We believe now is the right time to enter into a strategic transaction to reduce our capital investment in Navistar Defense.
Partnering with Cerberus reduces our exposure to certain unpredictability inherent in military sales, and allows us to
participate in the potential upside of the defense business through an ongoing equity stake and our exclusive long-term
supply agreement for MILCOTS chassis and commercial parts.

• Warranty Costs—Warranty expense continues to reflect our current product portfolio and our commitment to quality and

customer uptime. Warranty expense as a percentage of manufacturing revenue declined to 1.7% from 2.4% a year ago. We
recognized a benefit for adjustments to pre-existing warranties of $9 million in 2018 and $1 million in 2017 compared to
charges for adjustments to pre-existing warranties of $77 million in 2016. This benefit was due to a decrease in claim
frequency across both the Medium Duty and Big Bore engine families in our Truck segment. For more information, see
Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.

•

Income Taxes—At October 31, 2018, we had $2.7 billion of U.S. federal net operating loss carryforwards and $197 million
of federal tax credit carryforwards. We expect our cash payments of U.S. taxes will be minimal for as long as we are able
to offset our U.S. taxable income by these U.S. net operating losses and tax credits, which have carryforward periods of up
to 20 years. We also have state and foreign net operating losses that are available to reduce cash payments of state and
foreign taxes in future periods.

We maintain valuation allowances on our U.S. and certain foreign deferred tax assets because it is more likely than not that
those deferred tax assets will not be realized. It is reasonably possible within the next twelve months that additional
valuation allowances may be required on certain foreign deferred tax assets. For more information, see Note 11, Income
Taxes, to the accompanying consolidated financial statements.

• Core Business Evaluation—We are focused on improving our Truck and Parts businesses in our Core markets. We are

working to fix, divest or close under-performing and non-strategic areas and expect to realize incremental benefits from
these actions in the near future. In addition, we are restructuring our business and rationalizing our Manufacturing
operations in an effort to optimize our cost structure. This effort is ongoing and may lead to additional divestitures of
businesses or discontinuing programs that are outside of our Core operations or are not performing to our expectations.

As a result of these evaluations, we ceased engine production at our Melrose Park Facility in 2018. We completed the sale
of our railcar business in Cherokee, Alabama in February 2018. In May 2017, we completed the sale of a business line
included in our Parts segment. During August 2017, we also sold our fabrication business in Conway, Arkansas.

• North and Latin American Economy—The outlook for the economies in both the U.S. and Canada remain cautiously

optimistic with moderate growth expectations. A tight labor market, strong consumer confidence, and solid manufacturing
activities continue to support the U.S. economy to remain above a long-run trend pace. However, rising inflation,
tightening monetary policy, and slowing emerging market activities present risks to the economic expansion. Growth in
Latin America is projected to accelerate moderately, largely reflecting the growth in commodity exporters, including
Brazil, Chile, Colombia, and Peru. However, the growth trend continues to be challenged by country-specific factors. The
new United States, Mexico, and Canada trade agreement will reinforce the stability of Mexico’s economy with a modest
expansion in 2019.

•

Impact of Government Regulation—As a manufacturer of trucks and engines, we continue to face significant governmental
regulation of our products, especially in the areas of environmental and safety matters. We are also subject to various noise
standards imposed by federal, state, and local regulations. Our facilities may be subject to regulation related to climate
change, and climate change itself may also have some impact on our operations. However, these impacts are currently
uncertain and we cannot predict the nature and scope of those impacts. For more information, see Impact of Government
Regulation in Part I, Item I, Business.

Results of Continuing Operations

The following information summarizes our Consolidated Statements of Operations and illustrates the key financial indicators
used to assess our consolidated financial results.

Results of Operations for the year ended October 31, 2018 as compared to the year ended October 31, 2017.

(in millions, except per share data and % change)
Sales and revenues, net........................................................................................ $ 10,250
8,317
(1)
14

Costs of products sold ..................................................................................

Asset impairment charges ............................................................................

Restructuring charges ...................................................................................

2018

Selling, general and administrative expenses...............................................

Engineering and product development costs................................................

Interest expense ............................................................................................

Other income, net .........................................................................................

Total costs and expenses......................................................................................

Equity in income of non-consolidated affiliates..................................................
Income from continuing operations before income taxes ...................................

Income tax expense .............................................................................................

Income from continuing operations.....................................................................

Less: Net income attributable to non-controlling interests..................................
Income from continuing operations(A) .......................................................................
Income from discontinued operations, net of tax ................................................
Net income (A) ...................................................................................................... $

Diluted earnings per share:(A)

Continuing operations .................................................................................. $
Discontinued operations ...............................................................................

Diluted weighted average shares outstanding .....................................................

922

297

327
(46)
9,830

—

420
(52)
368

28
340

—

340

3.41

—

3.41

99.6

_________________________
N.M. Not meaningful.
(A)

Amounts attributable to NIC.

Sales and revenues, net

2017
$ 8,570

7,037

878

251

351
(21)
8,512

64
(10)
54

25
29

0.31

0.01

0.32

93.5

Change
$ 1,680

% Change
20 %

1,280
(4)
1

46
(24)
(25)
1,318
(6)
356
(42)
314

3
311
(1)
310

3.10
(0.01)
3.09

6.1

18 %

(133)%

8 %

5 %

18 %

(7)%

119 %

15 %

(100)%

556 %

420 %

581 %

12 %
N.M.

(100)%

N.M.

(100)%

966 %

7 %

Our sales and revenues, net, are principally generated via sales of products and services. Sales and revenues, net in our
Consolidated Statements of Operations, by reporting segment were as follows:

(in millions, except % change)
Truck.................................................................................................................... $
Parts .....................................................................................................................
Global Operations................................................................................................
Financial Services................................................................................................
Corporate and Eliminations.................................................................................

2018
7,490
2,407
360
257
(264)
Total.............................................................................................................. $ 10,250

2017
5,809
2,392
309
235
(175)
8,570

Change

1,681
15
51
22
(89)
1,680

% Change
29%
1%
17%
9%

51%

20%

In 2018, our Truck segment net sales increased by $1,681 million, or 29%, primarily due to higher volumes in our Core
markets, an increase in defense sales, higher used truck sales, and a shift in model mix, partially offset by a decline in Mexico
truck volumes and lower sales due to the exit of our railcar business in Cherokee, Alabama. Chargeouts from our Core markets
were up 29%, which is reflective of an improvement in our Class 8 truck volumes and market share.

In 2018, our Parts segment net sales increased by $15 million, or 1%, primarily due to pricing, higher Mexico and export
volumes and parts sales related to the Fleetrite™ brand, partially offset by lower U.S. and Canada volumes and BDP sales.

In 2018, our Global Operations segment net sales increased by $51 million, or 17%, primarily driven by higher engine volumes
in our South America engine operations due to the improving Brazilian economy, partially offset by the depreciation of the
Brazilian real against the U.S. dollar as the average conversion rate weakened by 10% compared with the prior year.

In 2018, our Financial Services segment net revenues increased by $22 million or 9%. The increase is primarily driven by
higher revenues from operating leases and higher average portfolio balances in the U.S. and Mexico.

Costs of products sold

In 2018, Costs of products sold increased by $1,280 million, primarily driven by the impact of higher volumes in our Core
markets.

In 2018, we recorded charges to our used truck reserve of $50 million compared to $111 million in 2017. During 2017, we
implemented a shift in market mix to include an increase in volume to certain export markets, which have a lower price point as
compared to sales through our domestic channels, and to lower domestic pricing to enable higher sales velocity. We have
decreased our gross used truck inventory balances and inventory reserves as a result of the shift in market mix and change in
pricing strategy.

In 2018, we recognized a benefit for adjustments to pre-existing warranties of $9 million compared to $1 million in 2017. We
have a benefit primarily due to the decrease in claim frequency across both the Medium Duty and Big Bore engine families in
our Truck segment. The impact decreased the reserve for our standard warranty obligations as well as the loss positions related
to our Big Bore extended service contracts.

For more information on our estimated warranty obligations and our used truck reserves, see Note 1, Summary of Significant
Accounting Policies, to the accompanying consolidated financial statements.

Restructuring Charges

We recognized a restructuring benefit of $1 million in 2018, compared to a charge of $3 million in 2017. During 2017, we
recorded postretirement net benefits of $36 million related to the execution of the closure agreement and wind-up charges for
our Chatham, Ontario plant, partially offset by postretirement and severance charges of $31 million related to our plan to cease
production at our Melrose Park Facility, among other items. For more information, see Note 2, Restructuring and Impairments,
to the accompanying consolidated financial statements.

Selling, general and administrative expenses

In 2018, our SG&A expenses increased by $44 million compared to 2017 primarily due to employee compensation expenses,
expenses related to growth initiatives, and profit sharing accruals related to supplemental benefits for certain retirees, partially
offset by the impact of charges related to the MaxxForce engine EGR product litigation recorded during 2017. For more
information on our legal proceedings, see Note 13, Commitments and Contingencies, to the accompanying consolidated
financial statements.

Engineering and product development costs

In 2018, our Engineering and product development costs increased by $46 million compared to 2017 primarily due to our
development agreements with TRATON Group involving the expense of certain engine and transmission development costs
and higher research and product development costs to meet future emission standard regulatory requirements.

Interest expense

In 2018, our Interest expense decreased by $24 million compared to the prior year primarily driven by lower effective interest
rates related to our issuance of the 6.625% Senior Notes and the Term Loan Credit Agreement in November 2017, which
refinanced our 8.25% Senior Notes and Term Loan, partially offset by the impact of higher average borrowing levels for finance
receivables funding.

Other income, net

We recognized Other income of $46 million in 2018, compared to $21 million in the prior year. The increase was primarily
driven by a settlement of a business economic loss claim related to our Alabama engine manufacturing facility, for which we
recorded a gain of $70 million representing the net present value from the Deepwater Horizon Settlement Program. This
increase was partially offset by $46 million of charges related to the extinguishment of unamortized debt issuance costs and
tender premium payments associated with the repurchase of our 8.25% Senior Notes and refinancing of our previous Term

Loan with the Term Loan Credit Agreement. For more information on the business economic loss settlement, see Note 13,
Commitments and Contingencies, to the accompanying consolidated financial statements.

Income tax expense

In 2018, we recognized income tax expense from continuing operations of $52 million, compared to $10 million in the prior
year. The increase in income tax expense is primarily driven by a $28 million intraperiod allocation benefit in domestic
continuing operations due to certain post retirement plan remeasurement gains and a release of various state uncertain tax
position liabilities of $14 million, both recorded in 2017.

Net income attributable to non-controlling interests

Net income attributable to non-controlling interests is the result of our consolidation of subsidiaries that we do not wholly own.
Substantially all of our net income attributable to non-controlling interests in 2018, 2017, and 2016 relates to Ford's non-
controlling interest in BDP.

Segment Results of Continuing Operations for 2018 as Compared to 2017

We operate in four reporting segments: Truck, Parts, Global Operations, and Financial Services.

We define segment profit (loss) as net income (loss) from continuing operations attributable to NIC excluding income tax
benefit (expense). The following sections analyze operating results as they relate to our four segments and do not include
intersegment eliminations. For additional information concerning our segments, see Note 14, Segment Reporting, to the
accompanying consolidated financial statements.

Truck Segment

(in millions, except % change)
Truck segment sales, net...................................................................................... $
Truck segment profit (loss)..................................................................................

2018
7,490

397

2017
5,809
(6)

Change

1,681

% Change
29%

403

N.M.

_________________________
N.M. Not meaningful.

Segment sales

Segment results

In 2018, our Truck segment results improved by $403 million, The improvement is primarily driven by the impact of higher
volumes in our Core markets, higher other income, an increase in our defense sales margins, a decline in used truck losses, and
a $26 million benefit related to a request for an equitable adjustment claim in our defense business.

In 2018, we recorded charges in our Truck segment for our used truck reserve of $50 million compared to charges of $111
million in the prior year period. During the second quarter of 2017, we implemented a shift in market mix for our used trucks to
include an increase in volume to certain export markets, which had a lower price point as compared to sales through our
domestic channels, and to lower domestic pricing to enable higher sales velocity of our used trucks.

In 2018, we recorded a benefit of $9 million in our Truck segment for adjustments to pre-existing warranties compared to
charges of $8 million in the prior year. We have a benefit in the current year primarily due to the decrease in claim frequency
across both the Medium Duty and Big Bore engine families. The impact decreased the reserve for our standard warranty
obligations as well as the loss positions related to our Big Bore extended service contracts.

In 2018, we also recorded a $70 million gain related to the settlement of a business economic loss claim which was recognized
in Other income, net in our Consolidated Statements of Operations.

Parts Segment

(in millions, except % change)
Parts segment sales, net ....................................................................................... $
Parts segment profit.............................................................................................

2018
2,407

2017
2,392

569

616

Change

15
(47)

% Change
1 %

(8)%

Segment sales

Segment profit

In 2018, our Parts segment profit decreased by $47 million, or 8%, primarily due to lower U.S. margins, and higher freight-
related expenses and intercompany access fees. Access fees are allocated to the Parts segment from the Truck segment,
primarily for development of new products, and consist of certain engineering and product development costs, depreciation
expense, and SG&A costs.

Global Operations Segment

(in millions, except % change)
Global Operations segment sales, net.................................................................. $
Global Operations segment profit (loss)..............................................................

2018

2017

Change

360

309
(7)

% Change
17%

129%

Segment sales

Segment results

In 2018, our Global Operations segment results increased by $9 million, or 129%. The improvement was driven by the impact
of higher engine volumes and cost-reduction actions initiated in 2017. In 2017, our Global Operations segment results included
a $9 million benefit recognized as an adjustment to pre-existing warranties and other income related to the sale of machinery
and equipment.

Financial Services Segment

(in millions, except % change)
Financial Services segment revenues, net ........................................................... $
Financial Services segment profit .......................................................................

2018

2017

Change

257

235

% Change
9%

14%

Segment revenues

In 2018, our Financial Services segment net revenues increased by $22 million, or 9%. The increase is primarily driven by
higher revenues from operating leases and higher average portfolio balances in the U.S. and Mexico.

Segment profit

In 2018, our Financial Services segment profit increased by $11 million, or 14%. The increase is primarily driven by higher
revenues and is partially offset by higher interest expense, an increase in the provision for loan losses in Mexico, and higher
depreciation expense on operating leases.

Results of Operations for the year ended October 31, 2017 as compared to the year ended October 31, 2016

(in millions, except per share data and % change)
Sales and revenues, net................................................................................ $
Costs of products sold ..........................................................................

2017
8,570

7,037

2016
8,111

6,812

Change
459

Restructuring charges ...........................................................................

Asset impairment charges ....................................................................

Selling, general and administrative expenses.......................................

Engineering and product development costs........................................

Interest expense ....................................................................................

Other income, net .................................................................................

Total costs and expenses..............................................................................

Equity in income of non-consolidated affiliates..........................................

Income (loss) from continuing operations before income taxes .................

Income tax expense .....................................................................................

Income (loss) from continuing operations...................................................
Less: Net income attributable to non-controlling interests..........................
Income (loss) from continuing operations(A) .....................................................
Income from discontinued operations, net of tax ........................................
Net income (loss)(A) ..................................................................................... $

Diluted earnings (loss) per share:(A)

Continuing operations .......................................................................... $
Discontinued operations .......................................................................

Diluted weighted average shares outstanding .............................................

878

251

351
(21)
8,512

64
(10)
54
25
29

0.31

0.01

0.32

93.5

802

247

327
(76)
8,149

6
(32)
(33)
(65)
32
(97)
—
(97)

(1.19)
—
(1.19)
81.7

_________________________
N.M. Not meaningful.
(A)

Amounts attributable to Navistar International Corporation.

Sales and revenues, net

% Change

6 %

3 %

(70)%

(52)%

9 %

2 %

7 %

(72)%

4 %

— %

(300)%

(70)%

(183)%
(22)%
(130)%

N.M.

(131)%

(126)%

N.M.

(127)%

14 %

225
(7)
(14)
76

363

—

119
(7)
126

127

1.50

0.01

1.51

11.8

Our sales and revenues, net, are principally generated via sales of products and services. Sales and revenues, net, by reporting
segment were as follows:

(in millions, except % change)
Truck............................................................................................................ $
Parts .............................................................................................................
Global Operations........................................................................................
Financial Services........................................................................................
Corporate and Eliminations.........................................................................

Total...................................................................................................... $

2017

2016

Change

% Change

5,809
2,392
309
235
(175)
8,570

5,403
2,427
341
235
(295)
8,111

406
(35)
(32)
—
120
459

8 %
(1)%
(9)%
— %
(41)%
6 %

In 2017, our Truck segment net sales increased $406 million, or 8%, primarily due to higher volumes in our Core markets, an
increase in Mexico truck volumes, an increase in sales of GM-branded units manufactured for GM, and higher used truck sales.
Chargeouts from our Core markets were up 8%, which is reflective of an improvement in our Class 8 volumes and market
share.

In 2017, our Parts segment net sales decreased $35 million, or 1%, primarily due to lower BDP sales and lower North America
volumes, partially offset by higher U.S. and Canada parts sales related to the Fleetrite™ brand and remanufactured parts sales.

In 2017, our Global Operations segment net sales decreased $32 million, or 9%, primarily driven by lower engine and
component volumes in our South America engine operations, which declined 31% due to the impact of continued weakness in
the Brazilian economy as well as the cessation of sales to an OEM customer in 2016. The decrease in volume was partially

offset by the appreciation of the Brazilian real against the U.S. dollar as the average conversion rate strengthened by 11%
compared with the prior year period.

In 2017, our Financial Services segment net revenues were comparable to the prior year primarily driven by higher interest
rates and higher revenues from operating leases in Mexico, offset by lower average finance receivable balances and
unfavorable movements in foreign currency exchange rates impacting our Mexican portfolio.

Costs of products sold

In 2017, Costs of products sold increased by $225 million, reflecting the impact of higher volumes in our Core markets, Mexico
truck volumes, and market pressures, partially offset by a decrease in used truck losses, improved material costs, and lower
adjustments to pre-existing warranties.

In 2017, we recorded charges to our used truck reserve of $111 million compared to $187 million in 2016. During the second
quarter of 2017, we implemented a shift in market mix to include an increase in volume to certain export markets, which have a
lower price point as compared to sales through our domestic channels, and lower domestic pricing to enable higher sales
velocity. We decreased our gross used truck inventory balances and inventory reserves as a result of the shift in market mix and
change in pricing strategy.

In 2017, we recognized a benefit for adjustments to pre-existing warranties of $1 million compared to a charge of $78 million
in 2016. The decline in charges is primarily due to the reduction in claim frequency across both the medium duty and big bore
engine families in our Truck segment. The impact decreased the reserve for our standard warranty obligations.

For more information on our estimated warranty obligations and our used truck reserves, see Note 1, Summary of Significant
Accounting Policies, to the accompanying consolidated financial statements.

Restructuring Charges

We recognized restructuring charges of $3 million in 2017 compared to $10 million in 2016. The decrease is primarily due to
postretirement net benefits of $36 million related to the execution of the closure agreement and wind-up charges for our
Chatham, Ontario plant, partially offset by postretirement and severance charges of $31 million related to our plan to cease
production at our Melrose Park Facility, and certain cost reduction actions impacting our Global Operations segment. For more
information, see Note 2, Restructuring and Impairments, to the accompanying consolidated financial statements.

Selling, general and administrative expenses

In 2017, our SG&A expenses increased by $76 million compared to 2016 primarily due to an increase in employee
compensation expense and charges related to EGR product litigation. For more information on our legal proceedings, see Note
10, Commitments and Contingencies, to the accompanying consolidated financial statements.

Interest expense

In 2017, our interest expense increased by $24 million compared to 2016 primarily driven by the January 2017 issuance of
additional Senior Notes, increased amortization of debt issuance costs, and an increase in average borrowing rates, partially
offset by the impact of the lower interest rate related to the February 2017 refinancing of our Term Loan and lower average
borrowing levels for finance receivables funding.

Other income, net

We recognized Other income of $21 million in 2017, compared to $76 million in the prior year. The decrease in Other income
in 2017 is primarily due to a one-time $15 million fee received from a third party in the first quarter of 2016, deferred income
for an IP license of $19 million in the second quarter of 2016, $13 million of IP license income in the third quarter of 2016, and
unfavorable movements in foreign currency exchange rates, partially offset by the sale of a business line and machinery and
equipment in 2017.

Income tax expense

In 2017, we recognized income tax expense from continuing operations of $10 million, compared to $33 million in the prior
year. The decline in income tax expense is primarily driven by a $28 million intraperiod allocation benefit in domestic
continuing operations due to certain post retirement plan remeasurement gains and a release of various state uncertain tax
position liabilities of $14 million, partially offset by an increase in foreign taxes in Canada and Mexico and the non-recurring
benefit of $13 million from the release of the valuation allowance on U.S. AMT credits due to the U.S. enactment of the
Protecting Americans from Tax Hikes Act of 2015 recorded in the first quarter of 2016.

Net income attributable to non-controlling interests

Net income attributable to non-controlling interests is the result of our consolidation of subsidiaries that we do not wholly own.
Substantially all of our net income attributable to non-controlling interests in 2017 and 2016 relates to Ford's non-controlling
interest in BDP.

Segment Results of Continuing Operations for 2017 as Compared to 2016

Truck Segment

(in millions, except % change)
Truck segment sales, net.............................................................................. $
Truck segment loss ......................................................................................

2017

2016

Change

% Change

5,809
(6)

5,403
(189)

406
183

8%
97%

Segment sales

In 2017, our Truck segment net sales increased by $406 million, or 8%, primarily due to higher volumes in our Core markets,
an increase in Mexico truck volumes, an increase in sales of GM-branded units manufactured for GM, and higher used truck
sales. Chargeouts from our Core markets were up 8%, which is reflective of an improvement in our Class 8 volumes and market
share. The improvement represents a 17% increase in Class 6 and 7 medium trucks, a 3% increase in Class 8 heavy trucks, a 9%
increase in Class 8 severe service trucks and a 1% increase in buses.

Segment loss

In 2017, our Truck segment loss decreased by $183 million, or 97%, primarily driven by the impact of higher volumes in our
Core markets and Mexico, a decrease in used truck losses, lower adjustments to pre-existing warranties, improved material
costs, partially offset by market pressures, charges related to the MaxxForce engine EGR product litigation of $31 million, and
a decrease in Other Income.

In 2017, we recorded charges in our Truck segment for our used truck reserve of $111 million compared to charges of $187
million in the respective prior year period. During the second quarter of 2017, we implemented a shift in market mix to include
an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic
channels, and lower domestic pricing to enable higher sales velocity.

In 2017, we recorded charges in our Truck segment for adjustments to pre-existing warranties of $8 million compared to
charges of $78 million in the prior year. The decline in charges is primarily due to the reduction in claim frequency across both
the Medium Duty and Big Bore engine families in our Truck segment. The impact decreased the reserve for our standard
warranty obligations.

Additionally, the decline in Other Income during 2017 is due to a one-time $15 million fee received from a third party in the
first quarter of 2016, deferred income for an IP license of $19 million in the second quarter of 2016, $13 million of IP license
income in the third quarter of 2016, and an overall decline in the allocable share base of Access Fees from our Parts segment as
a result of lower engineering and product development costs in recent years.

Parts Segment

(in millions, except % change)
Parts segment sales, net ............................................................................... $
Parts segment profit.....................................................................................

2017

2016

Change

% Change

2,392
616

2,427
640

(35)
(24)

(1)%
(4)%

Segment sales

In 2017, our Parts segment net sales decreased by $35 million, or 1%, primarily due to lower BDP sales and lower North
America volumes, partially offset by higher U.S. and Canada parts sales related to the Fleetrite™ brand and remanufactured
parts sales.

Segment profit

In 2017, our Parts segment profit decreased by $24 million, or 4%, primarily due to margin declines in BDP and in our U.S.
market, partially offset by higher other income of $6 million related to the sale of a business line and lower intercompany
access fees. Access fees are allocated to the Parts segment from the Truck segment, primarily for development of new products,
and consist of certain engineering and product development costs, depreciation expense, and SG&A costs. The decrease in the
allocable share of fees in 2017 is due to significant decreases in engineering and product development costs in recent years.

Global Operations Segment

(in millions, except % change)
Global Operations segment sales, net.......................................................... $
Global Operations segment loss ..................................................................

2017

2016

Change

% Change

309
(7)

341
(21)

(32)
14

(9)%
67 %

Segment sales

In 2017, our Global Operations segment net sales decreased by $32 million, or 9%, primarily driven by lower engine and
component volumes in our South America engine operations, which declined 31% due to the impact of continued weakness in
the Brazilian economy as well as the cessation of sales to an OEM customer in 2016. The decrease in volume was partially
offset by the appreciation of the Brazilian real against the U.S. dollar as the average conversion rate strengthened by 11%
compared with the prior year period.

Segment loss

In 2017, our Global Operations segment loss decreased by $14 million, or 67%, primarily due to lower manufacturing and
SG&A expenses as a result of our prior year cost reduction efforts, a one-time benefit of $9 million recognized as an adjustment
to pre-existing warranties and higher other income related to the sale of machinery and equipment. These increases were
partially offset by an increase in restructuring charges in Brazil related to cost reduction actions consisting of personnel costs
for employee separation and related benefits.

Financial Services Segment

(in millions, except % change)
Financial Services segment revenues, net ................................................... $
Financial Services segment profit ...............................................................

2017

2016

Change

% Change

235
77

235
100

—
(23)

— %
(23)%

Segment revenues

In 2017, our Financial Services segment net revenues were comparable to the prior year primarily driven by higher interest
rates and higher revenues from operating leases in Mexico, offset by lower average finance receivable balances and unfavorable
movements in foreign currency exchange rates impacting our Mexican portfolio.

Segment profit

In 2017, our Financial Services segment profit decreased by $23 million, or 23%. The decrease is primarily driven by the pay
down of certain intercompany loan receivables in the prior year and lower interest margin resulting from an increase in our
average borrowing rate.

Supplemental Information

The following tables provide additional information on truck industry retail units, market share data, order units, backlog units,
and chargeout units. These tables present key metrics and trends that provide quantitative measures of our performance.

Truck Industry Retail Deliveries

The following table summarizes approximate industry retail deliveries for our Core markets, categorized by relevant class,
according to Wards Auto and IHS Markit ("Polk") and our Core retail deliveries:

(in units)
Core Markets (U.S. and Canada)

School buses(A) ..................................
Class 6 and 7 medium trucks.............
Class 8 heavy trucks ..........................
Class 8 severe service trucks(B)..........
Total Core Markets(B) .............................
Combined class 8 trucks(B)........................
Navistar Core retail deliveries ..................

For the Years Ended October 31,

2018 vs 2017

2017 vs 2016

2018

2017

2016

Change

% Change

Change

% Change

33,100

98,800

206,400

70,300
408,600

276,700

71,400

35,100

86,100

146,200

60,600
328,000

206,800

56,700

32,800

86,800

165,700

61,100
346,400

226,800

54,700

(2,000)
12,700

60,200

9,700
80,600

69,900

14,700

(6)%

2,300
(700)
15 %
41 % (19,500)
(500)
16 %
25 % (18,400)
34 % (20,000)
2,000
26 %

7 %

(1)%

(12)%

(1)%
(5)%

(9)%

4 %

_________________________
(A) The School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag.
(B) Retail deliveries include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.

Truck Retail Delivery Market Share

The following table summarizes our approximate retail delivery market share percentages for the Class 6 through 8 U.S. and
Canada truck markets, based on market-wide information from Wards Auto and Polk:

Core Markets (U.S. and Canada)

School buses(A) ....................................................................................
Class 6 and 7 medium trucks...............................................................
Class 8 heavy trucks ............................................................................
Class 8 severe service trucks(B)............................................................
Total Core Markets(B).................................................................
Combined class 8 trucks(B) ..................................................................

For the Years Ended October 31,

2018

2017

2016

33%

23%

14%

13%

17%

14%

32%

25%

11%

13%

17%

12%

34%

21%

10%

13%

16%

11%

_______________________
(A) The School bus retail delivery market share includes buses classified as B, C, and D and are being reported on a one-month lag.
(B) Retail delivery market share includes CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.

Truck Orders, net

We define orders as written commitments received from customers and dealers during the year to purchase trucks. Net orders
represent new orders received during the year less cancellations of orders made during the same year. Orders do not represent
guarantees of purchases by customers or dealers and are subject to cancellation. Orders may be either sold orders, which will be
built for specific customers, or stock orders, which will generally be built for dealer inventory for eventual sale to customers.
These orders may be placed at our assembly plants in the U.S. and Mexico for destinations anywhere in the world and include
trucks and buses. Historically, we have had an increase in net orders for stock inventory from our dealers at the end of the year
due to a combination of demand and, from time to time, incentives to the dealers. Increases in stock orders typically translate to
higher future chargeouts. The following table summarizes our approximate net orders for Core units:

(in units)
Core Markets (U.S. and Canada)

For the Years Ended October 31,

2018 vs 2017

2017 vs 2016

2018

2017

2016

Change

% Change

Change

% Change

School buses ......................................
Class 6 and 7 medium trucks.............
Class 8 heavy trucks ..........................
Class 8 severe service trucks(A)..........
Total Core Markets(A) .............................
Combined class 8 trucks(A) ................

12,800

34,700

42,400

15,000

104,900

57,400

11,000

21,200

18,900

8,800

59,900

27,700

11,900

16,900

6,300

7,700

42,800

14,000

1,800

13,500

23,500

6,200

45,000

29,700

16%

64%

(900)
4,300

(8)%

25 %

124%

12,600

200 %

70%

75%

107%

1,100

17,100

13,700

14 %

40 %

98 %

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

Truck Backlogs

We define order backlogs ("backlogs") as orders yet to be built as of the end of the period. Our backlogs do not represent
guarantees of purchases by customers or dealers and are subject to cancellation. Although backlogs are one of many indicators
of market demand, other factors such as changes in production rates, internal and supplier available capacity, new product
introductions, and competitive pricing actions may affect point-in-time comparisons. Backlogs exclude units in inventory
awaiting additional modifications or delivery to the end customer. The following table summarizes our approximate backlog for
Core units:

(in units)
Core Markets (U.S. and Canada)

School buses ......................................
Class 6 and 7 medium trucks.............
Class 8 heavy trucks ..........................
Class 8 severe service trucks(A)..........
Total Core Markets(A)..............................
Combined class 8 trucks(A) ................

For the Years Ended October 31,

2018 vs 2017

2017 vs 2016

2018

2017

2016

Change

% Change

Change

% Change

2,400

14,500

20,800
7,700

45,400

28,500

1,700

4,600

6,800
2,500

15,600

9,300

2,100

4,100

4,700
2,100

13,000

6,800

700

9,900

14,000
5,200

29,800

19,200

41%

215%

206%
208%

191%

206%

(400)
500

2,100
400

2,600

2,500

(19)%

12 %

45 %
19 %

20 %

37 %

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

Truck Chargeouts

We define chargeouts as trucks that have been invoiced to customers. The units held in dealer inventory represent the principal
difference between retail deliveries and chargeouts. The following table summarizes our approximate worldwide chargeouts:

(in units)
Core Markets (U.S. and Canada)

School buses(A) ............................
Class 6 and 7 medium trucks.......
Class 8 heavy trucks ....................
Class 8 severe service trucks(B)....
Total Core Markets ...........................
Non "Core" defense .....................
Other markets(C)...........................
Total worldwide units........................
Combined class 8 trucks..............

For the Years Ended October 31,

2018 vs 2017

2017 vs 2016

2018

2017

2016

Change

% Change

Change

% Change

12,200

24,300

27,800

9,600

73,900

700

9,600

84,200

37,400

11,300

20,900

16,800

8,300

11,200

17,800

16,300

7,600

57,300

52,900

800

10,800

68,900

25,100

500

9,900

63,300

23,900

900

3,400

11,000

1,300

16,600
(100)
(1,200)
15,300

12,300

8 %

16 %

65 %

16 %

29 %

(13)%

(11)%

22 %

49 %

100

3,100

500

700

4,400

300

900

5,600

1,200

17%

60%

_____________________________
(A)
(B)
(C)

The School bus chargeouts include buses classified as B, C, and D and are being reported on a one-month lag.
Chargeouts include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.
Other markets primarily consist of Export Truck and Mexico.

Liquidity and Capital Resources

Consolidated cash, cash equivalents, and marketable securities

(in millions)
Consolidated cash and cash equivalents ........................................................................... $
Consolidated marketable securities...................................................................................

Consolidated cash, cash equivalents, and marketable securities ............................... $

(in millions)
Manufacturing operations ................................................................................................. $
Financial Services operations............................................................................................

Consolidated cash, cash equivalents, and marketable securities ............................... $

1,421

Manufacturing cash, cash equivalents, and marketable securities

As of October 31,

2018

2017

2016

1,320

101

1,421

706

370

1,076

As of October 31,

2018

2017

1,362

1,036

1,076

804

850

2016

800

850

Manufacturing cash, cash equivalents, and marketable securities, and Financial Services cash, cash equivalents and marketable
securities are not presented in accordance with, and should not be viewed as an alternative to, GAAP. This non-GAAP financial
information should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in
accordance with GAAP. However, we believe that non-GAAP reporting provides meaningful information and therefore we use
it to supplement our GAAP reporting by identifying items that may not be related to the Core manufacturing business. We
provide this information for an additional analysis of our ability to meet our operating requirements, capital expenditures,
equity investments, and financial obligations. Manufacturing cash, cash equivalents, and marketable securities represent our
consolidated cash, cash equivalents, and marketable securities, which excludes cash, cash equivalents, and marketable securities
of our Financial Services operations. We include marketable securities with our cash and cash equivalents when assessing our
liquidity position as our investments are highly liquid in nature.

Consolidated cash, cash equivalents, and marketable securities totaled $1.4 billion at October 31, 2018, which includes an
immaterial amount of cash and cash equivalents primarily attributable to BDP that is generally not available to satisfy our
obligations. For additional information on the consolidation of BDP, see Note 1, Summary of Significant Accounting Policies, to
the accompanying consolidated financial statements.

Cash Requirements

We generate cash flows for operations from the sale of trucks, buses, diesel engines, and parts, as well as from product
financing provided to our dealers and retail customers by our Financial Services operations. We fund our operations and
strategic plans primarily with cash, cash generated from operations, debt and equity. It is our opinion that, in the absence of
significant extraordinary cash demands, our: (i) level of cash, cash equivalents, and marketable securities, (ii) current and
forecasted cash flow from our Manufacturing operations and Financial Services operations, (iii) availability under various
funding facilities, (iv) current and forecasted availability from various funding alliances, and (v) access to capital in the capital
markets, will provide sufficient funds to meet operating requirements, capital expenditures, investments, and financial
obligations on both a short-term and long-term basis. Future Manufacturing operations debt obligations are expected to be met
through a combination of cash generation from operations and refinancing activities. We also believe the quality of our
underlying portfolio of receivables will ensure the ongoing funding from various sources and alliance partners and will permit
our Financial Services operations to meet our financing requirements and those of our dealers, and retail customers.

We have capacity under our various debt arrangements to raise additional cash by incurring incremental debt. The covenants in
all of our debt agreements permit us to refinance existing debt instruments as they mature. Our 4.75% Senior Secured
Convertible Notes mature in April 2019, at which time we expect to either repay from cash-on-hand and/or refinance with long
term debt.

Our Manufacturing operations sold $8.5 billion, $7.4 billion and $7.2 billion of wholesale notes and accounts receivable to our
Financial Services operations during the years ended October 31, 2018, 2017 and 2016, respectively. The total outstanding
balance of wholesale notes and accounts receivable purchased was $1.7 billion and $1.4 billion as of October 31, 2018 and
2017, respectively. Total loans outstanding from our Financial Services operations to our Manufacturing operations were $212
million and $91 million as of October 31, 2018 and 2017, respectively.

Included in loans made from Financial Services operations to Manufacturing operations is a new $150 million loan made
during the year ended October 31, 2018 in which NFC loaned certain proceeds from its successful $400 million Term Loan B
financing. Also included in loans made from Financial Services operations to Manufacturing operations is an intercompany
financing from NFC that is secured by a first priority lien on used truck inventory, and certain related assets (the "Intercompany
Used Truck Loan"). As of October 31, 2018 and October 31, 2017, our borrowings under the Intercompany Used Truck Loan
were zero and $29 million, respectively. Our Manufacturing operations also have an intercompany revolving loan agreement
(the "Intercompany Revolving Loan") with our captive insurance company under our Financial Services segment. During the
year ended October 31, 2018, our borrowings under the Intercompany Revolving Loan agreement remained at $7 million.

Our Financial Services operations in Mexico extend working capital loans to our Manufacturing operations in Mexico for
orders received. As of October 31, 2018 and October 31, 2017, the borrowings of our Manufacturing operations in Mexico
under these loan agreements were $55 million, for both periods.

See Note 9, Debt, to the accompanying consolidated financial statements for a description of our credit facilities and long-term
debt obligations.

Cash Flow Overview

Year Ended October 31, 2018

(in millions)
Net cash provided by (used in) operating activities .......................................... $
Net cash provided by (used in) investing activities...........................................

Net cash provided by 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 year ..........................................

Cash and cash equivalents at end of the year ............................................. $

1,261

Manufacturing
Operations(A)

Financial
Services
Operations and
Adjustments(A)
$

(150) $
(113)
277

Consolidated
Statement of
Cash Flows

269
(59)
414
(10)
614

706

1,320

419

137
(15)
595

666

Year Ended October 31, 2017

Financial
Services
Operations and
Adjustments(A)
99
$
(53)
(51)
2
(3)
43

Consolidated
Statement of
Cash Flows

109
(542)
338
(3)
(98)
804

706

Year Ended October 31, 2016

Financial
Services
Operations and
Adjustments(A)
211
$
(70)
(150)
17

Consolidated
Statement of
Cash Flows

267
(67)
(353)
45
(108)
912

804

10
(489)
389
(5)
(95)
761

3
(203)
28
(116)
877

(in millions)
Net cash provided by operating activities ......................................................... $
Net cash used in investing activities..................................................................

Net cash provided by (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 year ..........................................

Manufacturing
Operations(A)

Cash and cash equivalents at end of the year ............................................. $

666

(in millions)
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.........................

Increase (decrease) in cash and cash equivalents.......................................

Cash and cash equivalents at beginning of the year ..........................................

Manufacturing
Operations(A)

Cash and cash equivalents at end of the year ............................................. $

761

_________________________
(A) Manufacturing operations cash flows and Financial Services operations cash flows are not presented in accordance with, and should not be viewed as an

alternative to, GAAP. This non-GAAP financial information should be considered supplemental to, and not as a substitute for, or superior to, financial
measures calculated in accordance with GAAP. However, we believe that non-GAAP reporting provides meaningful information and therefore we use it
to supplement our GAAP reporting by identifying items that may not be related to the Core manufacturing business. Management often uses this
information to assess and measure the performance and liquidity of our operating segments. Our Manufacturing operations, for this purpose, include our
Truck segment, Global Operations segment, Parts segment, and Corporate items which include certain eliminations. The reconciling differences between
these non-GAAP financial measures and our GAAP consolidated financial statements in Item 1, Financial Statements and Supplementary Data, are our
Financial Services operations and adjustments required to eliminate certain intercompany transactions between Manufacturing operations and Financial
Services operations. Our Financial Services operations cash flows are presented consistent with their treatment in our Condensed Consolidated Statements
of Cash Flows and may not be consistent with how they would be treated on a stand-alone basis. We have chosen to provide this supplemental
information to allow additional analysis, to illustrate the respective cash flows giving effect to the equity basis cash flow shown above, and to provide an
additional measure of performance and liquidity.

Manufacturing Operations

Manufacturing Operations Cash Flow from Operating Activities

Cash provided by operating activities was $419 million, $10 million and $56 million in 2018, 2017 and 2016, respectively. The
higher amount of cash generation from operating activities in 2018 compared to 2017 was primarily attributable to higher net
income, lower increases in accounts receivable, other current and noncurrent assets, and net payables with our Financial
Services operations, increases in accounts payable and other current and noncurrent liabilities, partially offset by higher
inventories.

Cash paid for interest, net of amounts capitalized, was $226 million, $223 million, and $227 million in 2018, 2017, and 2016,
respectively.

We paid $186 million, $193 million, and $199 million for 2018, 2017, and 2016 respectively, for costs associated with
postretirement benefits including pension and postretirement health care expenses for employees and surviving spouses and
dependents, the funding of trust assets, and other postretirement payments. These postretirement benefits did not include any
cash payments made from trust assets to beneficiaries.

Manufacturing Operations Cash Flow from Investing Activities

Cash provided by investing activities was $54 million and $3 million in 2018 and 2016, respectively, as compared to cash used
in investing activities of $489 million in 2017. The net increase in cash flow from investing activities in 2018 compared to 2017
was primarily attributable to lower purchases and higher maturities of marketable securities partially offset by a decrease in the
sale of marketable securities, an increase in capital expenditures, and an increase in the amount of restricted cash, higher
purchases of equipment leased to others, and lower proceeds from sales of property and equipment. During 2018, sales of
marketable securities totaled $460 million and maturities of marketable securities totaled $60 million, compared with $652
million of sales and $28 million of maturities of marketable securities and $539 million of sales and $43 million of maturities of
marketable securities during 2017 and 2016, respectively.

Manufacturing Operations Cash Flow from Financing Activities

Cash provided by financing activities was $137 million and $389 million in 2018 and 2017, respectively, compared to cash used
in financing activities of $203 million in 2016. The net decrease in cash flow from financing activities in 2018 compared to
2017 was primarily attributable to higher principal repayments of long-term debt, a decrease in the amount of proceeds received
from the issuance of common stock and higher debt issuance costs, partially offset by higher proceeds from the issuance of
long-term debt, a decrease in the amount of stock issuance costs and funding under the Intercompany Loan.

Financial Services Operations

Financial Services Operations and Adjustments to Cash Flow from Operating Activities

Cash used in operating activities was $150 million in 2018, compared to cash provided by operating activities of $99 million
and $211 million in 2017 and 2016, respectively. The decrease in cash provided by operating activities in 2018 was primarily
due to the increase in finance receivables funded. The decrease in cash provided by operating activities in 2017 was primarily
due to an increase in the level of finance receivables funded compared to a decrease in the prior year period, the utilization of a
trade payable with our Manufacturing operations, and a slight decline in segment profit of our Financial Services operations.

Cash paid for interest, net of amounts capitalized, was $80 million, $71 million, and $64 million in 2018, 2017, and 2016,
respectively.

Financial Services Operations and Adjustments to Cash Flow from Investing Activities

Cash used in investing activities was $113 million, $53 million and $70 million in 2018, 2017, and 2016, respectively. Changes
in restricted cash levels required under our secured borrowings, along with purchases of equipment leased to others, were the
primary sources and uses of cash from investing activities in 2018, 2017, and 2016. In 2018, the increase in cash used in
investing activities was primarily due to the increase in purchases of equipment leased to others, partially offset by a decline in
restricted cash levels under our secured borrowings. The decrease in cash used in investing activities in 2017 was primarily due
to a decline in purchases of equipment leased to others, partially offset by an increase in restricted cash levels.

Financial Services Operations and Adjustments to Cash Flow from Financing Activities

Cash provided by financing activities was $277 million in 2018, compared to cash used in financing activities of $51 million
and $150 million in 2017, and 2016 respectively. The net increase in cash provided by financing activities in 2018 was
primarily due to the increase in borrowing levels associated with the increase in the level of finance receivables funded. The net
decrease in cash used in financing activities in 2017 was primarily due to the increase in borrowing levels associated with the
increase in the level of finance receivables funded compared to the prior year period, partially offset by an increase in
repayments of debt using intercompany loan repayments received from our Manufacturing operations.

Debt

Funding of Financial Services

The Financial Services segment has traditionally relied upon secured borrowings on finance receivables, short and long-term
bank borrowings, medium and long-term debt, and commercial paper in Mexico to fund its provision of financing to our dealers
and retail customers. As of October 31, 2018, our funding consisted of asset-backed securitization debt of $948 million, senior
secured term debt of $394 million, bank borrowings and revolving credit facilities of $519 million, commercial paper of $75
million, and borrowings of $105 million secured by operating and finance leases.

We use a number of SPEs to securitize and sell receivables. Navistar Financial Securities Corporation ("NFSC") finances
wholesale notes, International Truck Leasing Corporation ("ITLC") finances operating leases and some finance leases, and
TRAC finances retail accounts.

Our Mexican financial services operations include Navistar Financial, S.A. de C.V., Sociedad Financiera de Objeto Multiple,
Entidad Regulada ("NFM"), which issue debt to provide vehicle financing to our dealers and retail customers in Mexico.

The following table sets forth the utilization under our bank credit and revolving funding facilities in place as of October 31,
2018:

Company

Instrument Type

Total
Amount

Purpose of Funding

Amount
Utilized

Matures or
Expires

(in millions)
NFSC ....... Wholesale note trust..........................

NFC.......... Credit agreement(A) ...........................

NFM......... Bank lines..........................................
TRAC....... Revolving retail accounts..................

______________________
(A) NFM can borrow up to $81 million, if not used by NFC.

269

900 Eligible wholesale notes ..................
Finance receivables and general
corporate purposes...........................
Finance receivables and general
588
corporate purposes...........................
100 Eligible retail accounts ....................

820

2019-2020

2021

498

100

2019-2024

2020

We are obligated under certain agreements with public and private lenders of NFC to maintain the subsidiary's income before
interest expense, capital contributions from NI, and income taxes at not less than 125% of its total interest expense. Under these
agreements, if NFC's consolidated income before interest expense, capital contributions from NI, and income taxes is less than
125% of its interest expense, NI must make a capital contribution to NFC to achieve the required ratio. No such payments were
required for the years ended October 31, 2018, 2017, and 2016.

Derivative Instruments

We use derivative financial instruments as part of our overall interest rate, foreign currency, and commodity risk management
strategies to reduce our interest rate exposure, to potentially increase the return on invested funds, to reduce exchange rate risk
for transactional exposures denominated in currencies other than the functional currency, and to minimize commodity price
volatility. The fair values of these derivatives are recorded as assets or liabilities on a gross basis in our Consolidated Balance
Sheets. For more information on derivatives and related market risks, see Item 7A, Quantitative and Qualitative Disclosures
about Market Risk.

Capital Resources

We expend capital to support our operating and strategic plans. Such expenditures include investments to meet regulatory and
emissions requirements, maintain capital assets, develop new products or improve existing products, and to enhance capacity or
productivity. Many of the associated projects have long lead-times and require commitments in advance of actual spending.

Business units provide their estimates of costs of capital projects, expected returns, and benefits to senior management. Those
projects are evaluated from the perspective of expected return and strategic importance, with a capital expenditure goal of
approximately $150 million in 2019, exclusive of capital expenditures for equipment leased to others. See Note 9, Debt, to the
accompanying consolidated financial statements.

Consolidated EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA, which excludes certain identified items that we do not consider to be part of our ongoing
business, are not in accordance with, and should not be viewed as an alternative to, U.S. GAAP. This non-GAAP financial
information should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in
accordance with U.S. GAAP.

We believe EBITDA provides meaningful information about the performance of our business and therefore we use it to
supplement our U.S. GAAP reporting. We believe that Adjusted EBITDA improves the comparability of year-to-year results,
and is representative of our underlying performance. Management uses this information to assess and measure the performance
of our operating segments. We have chosen to provide this supplemental information for an additional analysis of our operating
results, to illustrate the results of operations giving effect to the non-GAAP adjustments shown in the below reconciliations, and
to provide an additional measure of performance.

EBITDA reconciliation:

(in millions)
Income (loss) from continuing operations attributable to NIC, net of tax.................................. $
Plus:

For the Years Ended October 31,

2018

2017

2016

340

(97)

Depreciation and amortization expense...............................................................................
Manufacturing interest expense(A) .......................................................................................

211

235

223

265

225

247

Adjusted for:

Income tax expense .............................................................................................................
EBITDA...................................................................................................................................... $

(52)
838

(10)
527

(33)
408

______________________
(A) Manufacturing interest expense is the net interest expense primarily generated for borrowings that support the manufacturing and corporate operations,

adjusted to eliminate intercompany interest expense with our Financial Services segment. The following table reconciles Manufacturing interest expense
to the consolidated interest expense.

(in millions)
Interest expense .......................................................................................................................... $
Less: Financial Services interest expense..................................................................................
Manufacturing interest expense.................................................................................................. $

Adjusted EBITDA Reconciliation:

(in millions)
EBITDA (reconciled above)...................................................................................................... $
Adjusted for significant items of:

For the Years Ended October 31,

2018

2017

2016

327
92
235

351
86
265

327
80
247

For the Years Ended October 31,

2018

2017

2016

838

527

408

(1)
13

Adjustments to pre-existing warranties(A)..............................................................................
Asset impairment charges(B)...................................................................................................
Restructuring of manufacturing operations(C) ........................................................................
EGR product litigation(D) .......................................................................................................
Gain on sale (E) .......................................................................................................................
Debt refinancing charges(F) ....................................................................................................
One-time fee received(G) ........................................................................................................
Pension settlement(H)..............................................................................................................
Settlement gain(I) ....................................................................................................................
Total adjustments ........................................................................................................................
Adjusted EBITDA..................................................................................................................... $
_____________________
(A) Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior periods. Such adjustments typically

9
(72)
(12)
826

(9)
14
(1)
1

31
(6)
5

55
582

—

—
(15)
—

—

100
508

occur when claims experience deviates from historical and expected trends. Our warranty liability is generally affected by component failure rates, repair
costs, and the timing of failures. Future events and circumstances related to these factors could materially change our estimates and require adjustments to
our liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.
(B) During 2018, we recorded $14 million of impairment charges related to the exit of our railcar business in Cherokee, Alabama, certain long-lived assets
and certain assets under operating leases in our Truck and Financial Services segments. During 2017, we recorded $13 million of asset impairment
charges in our Truck segment relating to assets held for sale of our Conway, Arkansas fabrication business and for certain assets under operating leases.
During 2016, the charges primarily included $17 million related to certain long-lived assets and $8 million related to certain operating leases. We also
determined that $1 million of trademark asset carrying value was impaired.

(C) During 2018, we recognized a benefit of $1 million related to adjustments for restructuring in our Truck, Global Operations and Corporate segments.

During 2017, we recorded charges of $13 million primarily attributable to $41 million of charges related to our plan to cease production at our Melrose
Park Facility, a net benefit of $36 million related to the resolution of the closing agreement and wind up charges for our Chatham, Ontario plant, and the
release of $1 million in other postretirement benefit liabilities in connection with the sale of our fabrication business in Conway, Arkansas. We also
recorded $6 million of restructuring charges in Brazil related to cost reduction actions consisting of personnel costs for employee separation and related
benefits. During 2016, we recorded $7 million of charges related to the 2011 closure of our Chatham, Ontario plant and $3 million for cost reduction and
other strategic initiatives associated with the divestiture of non-strategic facilities and efforts to optimize our cost structure.

(D) During 2018, we recognized an additional charge of $1 million for a jury verdict related to the MaxxForce engine EGR product litigation in our Truck

segment. During 2017, we recognized a charge of $31 million related to that same jury verdict in our Truck segment.

(E) During 2017, we recognized a gain of $6 million related to the sale of a business line in our Parts segment.
(F) During 2018, we recorded a charge of $46 million for the write off of debt issuance costs and discounts associated with the repurchase of our 8.25%

Senior Notes and the refinancing of our previously existing Term Loan. During 2017, we recorded a charge of $5 million related to third party fees and
debt issuance costs associated with the replacement of our Term Loan with our Term Loan Credit Agreement and the refinancing of the revolving portion
of the NFC bank credit facility in our Financial Services segment.
(G) During 2016, we received a $15 million one-time fee from a third party.
(H) During 2018, we purchased a group annuity contract for certain retired pension plan participants resulting in a plan remeasurement. As a result, we

recorded a pension settlement accounting charge of $9 million in SG&A expenses.

(I) During 2018, we settled a business economic loss claim relating to our Alabama engine manufacturing facility in which we will receive a net present

value of $70 million, net of our fees and costs, from the Deepwater Horizon Settlement Program. We recorded the $70 million net present value of the
settlement and related interest income of $2 million in Other Income, net.

Pension and Other Postretirement Benefits

Our pension plans are funded by contributions made from Company assets in accordance with applicable U.S. and Canadian
government regulations. The regulatory funding requirements are computed using an actuarially determined funded status,
which is determined using assumptions that often differ from assumptions used to measure the funded status for U.S.
GAAP. U.S. funding targets are determined by rules promulgated under the Pension Protection Act of 2006 (the "PPA"). The
PPA additionally requires underfunded plans to achieve 100% funding over a period of time. From time to time, we have
discussions with and receive requests for certain information from the Pension Benefit Guaranty Corporation ("PBGC"). The
PBGC was created by ERISA to encourage the continuation and maintenance of private-sector defined benefit pension plans,
provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum. In July
2012, the Moving Ahead for Progress in the 21st Century Act was signed into law, impacting the minimum funding
requirements for pension plans, but not otherwise impacting our accounting for pension benefits. In August 2014, the Highway
and Transportation Funding Act of 2014, which included an extension of pension funding interest rate relief, was signed into
law. The Bi-Partisan Budget Act of 2015 was signed into law in November of 2015 and provided for further extension of
interest rate relief. These legislative measures will reduce our funding requirements over the next four years.

In 2018 and 2017, we contributed $132 million and $112 million, respectively, to our U.S. and Canadian pension plans (the
"Plans") to meet regulatory minimum funding requirements. In 2019 we expect to contribute approximately $140 million to
meet the minimum required contributions for all plans. Future contributions are dependent upon a number of factors, principally
the changes in values of plan assets, changes in interest rates, and the impact of any future funding relief. We currently expect
that from 2020 through 2022, we will be required to contribute approximately $175 million to $200 million per year to the
Plans, depending on asset performance and discount rates.

Our contributions to other post-employment benefit ("OPEB") plans totaled $1 million and $2 million in 2018 and 2017,
respectively. Other postretirement benefit obligations, such as retiree medical, are primarily funded in accordance with a 1993
settlement agreement (the "1993 Settlement Agreement") between us, our employees, retirees, and collective bargaining
organizations, which eliminated certain benefits provided prior to that date and provided for cost sharing between us and
participants in the form of premiums, co-payments, and deductibles. We expect to contribute $1 million to our OPEB plans
during 2019.

As part of the 1993 Settlement Agreement, a Base Program Trust was established in June 1993 to provide a vehicle for funding
the health care liability through our contributions and retiree premiums. A separate independent Retiree Supplemental Benefit
Program was also established, which included our contribution of Class B Common Stock, originally valued at $513 million, to
potentially reduce retiree premiums, co-payments, and deductibles and provide additional benefits in subsequent periods. In
addition to the Base Program Trust, we are contingently obligated to make profit sharing contributions to the Retiree
Supplemental Benefit Trust to potentially improve upon the basic benefits provided through the Base Program Trust. These
profit sharing contributions are determined by means of a calculation as established through the 1993 Settlement Agreement.
There were no profit sharing contributions to the Retiree Supplemental Benefit Trust during the years ended October 31, 2018,
2017 and 2016. During 2018, we recorded $30 million of profit sharing accruals based on the operating performance of the
entities that are included in the determination of qualifying profits which will be paid in the first quarter of 2019.

The funded status of our plans is derived by subtracting the actuarially-determined present value of the projected benefit
obligations from the fair value of plan assets at year end.

The underfunded status of our pension plans on a GAAP basis decreased $254 million during 2018 due to cash contributions
and an increase in the discount rate partially offset by lower than expected asset returns. Our actual return on assets during 2018
was approximately (1.4)% for the U.S. pension plans. The weighted average discount rates used to measure the postretirement
benefit obligation ("PBO") were 4.4% and 3.5% at October 31, 2018 and 2017, respectively.

The underfunded status of our health and life insurance benefits decreased by $154 million. This was primarily driven by an
increase in the discount rate and favorable claims experience and updated per capita cost assumptions.

We continue to seek opportunities to control our pension and other postretirement benefits expenses.

For more information, see Note 10, Postretirement Benefits, to the accompanying consolidated financial statements.

Off-Balance Sheet Arrangements

We enter into various arrangements not recognized in our Consolidated Balance Sheets that have or could have an effect on our
financial condition, results of operations, liquidity, capital expenditures, or capital resources. The principal off-balance sheet
arrangements that we enter into are guarantees that could obligate us to make future payments if the primary entity fails to
perform under its contractual obligations. These include residual value guarantees, for which our losses are generally capped,
stand-by letters of credit and surety bonds, credit and purchase commitments and indemnifications. We have recognized
liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet recognition and measurement
provisions. In addition to the liabilities that have been recognized, we are contingently liable for other potential losses under
various guarantees that are not recognized in our Consolidated Balance Sheets. We do not believe claims that may be made
under such guarantees would have a material effect on our financial condition, results of operations, or cash flows. For more
information, see Note 13, Commitments and Contingencies, to the accompanying consolidated financial statements.

Contractual Obligations

The following table provides aggregated information on our outstanding contractual obligations as of October 31, 2018:

(in millions)
Type of contractual obligation:

Payments Due by Year Ending October 31,

Total

2019

2020-2021

2022-2023

2024+

Long-term debt obligations(A).............................................. $
Interest on long-term debt(B) ................................................
Financing arrangements and capital lease obligations(C).....
Operating lease obligations(D)..............................................
Purchase obligations(E).........................................................

5,388

1,720

133

216

926

299

1,181

3,214

472

105

414

535

—

Total.............................................................................. $

7,471

1,313

1,817

550

3,791

_____________________
(A) Excludes offsetting discounts and issuance costs of $58 million and Financed Lease Obligations of $122 million. For more information, see Note 9, Debt,

to the accompanying consolidated financial statements.

(B) Amounts represent estimated contractual interest payments on outstanding debt. Rates in effect as of October 31, 2018 are used for variable rate debt. For

more information, see Note 9, Debt, to the accompanying consolidated financial statements.

(C) We lease many of our facilities as well as other property and equipment under financing arrangements and capital leases in the normal course of business,
including $2 million of interest obligations. Excludes a $1 million capital lease which is non-cash. For more information, see Note 6, Property and
Equipment, Net, to the accompanying consolidated financial statements.

(D) Lease obligations for facility closures are included in operating leases. Future operating lease obligations are not recognized in our Consolidated Balance

Sheets. For more information, see Note 6, Property and Equipment, Net, to the accompanying consolidated financial statements.

(E) Purchase obligations include various commitments in the ordinary course of business that would include the purchase of goods or services which are not
recognized in our Consolidated Balance Sheets. We also include certain contractual obligations recognized in our Consolidated Balance Sheets for which
payments will be made beyond the next year.

Due to the uncertainty with respect to the timing of cash payments associated with the settlement of audits with taxing
authorities and because of existing net operating loss carryforwards, the preceding table excludes uncertain tax positions of $27
million. We do not expect to make significant payments of these liabilities within the next year. For additional information, see
Note 11, Income Taxes, to the accompanying consolidated financial statements.

We have entered into industrial participation agreements, commonly known as offset agreements, with customers outside of the
U.S. to facilitate economic value back to entities within the foreign nations as the result of their procurement of goods and
services from us. These commitments may be satisfied by our placement of supply contracts to established companies within
the foreign nations, providing capabilities to the foreign nations, or the creation of joint ventures that generate profits and hire
nationals from within the foreign nations. In certain cases, penalties could be imposed if we do not meet our industrial
participation commitments. As of October 31, 2018, we have outstanding industrial participation agreements totaling $228
million that extend through 2026. Purchase order commitments associated with fulfilling the industrial participation agreements
are included in the purchase commitments amount above.

In addition to the above contractual obligations, we are also required to fund our Plans in accordance with the requirements of
the PPA. As such, we expect to contribute approximately $140 million in 2019 to meet the minimum required contributions for
all Plans. We currently expect that from 2020 through 2022, we will be required to contribute $175 million to $200 million per
year to the Plans, depending on asset performance and discount rates in the next several years. For additional information, see
Note 10, Postretirement Benefits, to the accompanying consolidated financial statements.

Other Information

Income Taxes

We file a consolidated U.S. federal income tax return for NIC and its eligible domestic subsidiaries. Our non-U.S. subsidiaries
file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for tax benefit carryforwards and the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax liabilities and assets at the end of each period are determined using enacted tax rates.

As of October 31, 2018 and 2017, we had deferred tax asset valuation allowances of $2.2 billion and $3.3 billion, respectively.
A valuation allowance is required to be established or maintained when, based on currently available information, it is more
likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes
provides that important factors in determining whether a deferred tax asset will be realized are whether there has been sufficient
taxable income in recent years and whether sufficient taxable income is expected in future years in order to utilize the deferred
tax asset.

We believe that our evaluation of deferred tax assets and the need for a valuation allowance against such assets involve critical
accounting estimates because they are subject to, among other things, estimates of future taxable income in the U.S. and in non-
U.S. tax jurisdictions. These estimates are susceptible to change and dependent upon events that may or may not occur. Our
assessment of the need for a valuation allowance is material to the assets reported on our Consolidated Balance Sheets and
changes in the valuation allowance may be material to our results of operations. We intend to continue to assess our valuation
allowance in accordance with the guidance on accounting for income taxes.

We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement.

We released $14 million of uncertain tax positions based on administrative practice and precedents of relevant tax authorities in
2017.

As of October 31, 2018 and 2017, the amount of liability for uncertain tax positions was $27 million and $34 million,
respectively. If these unrecognized tax benefits are recognized, all would impact our effective tax rate, except for positions for
which we maintain a full valuation allowance against certain deferred tax assets. In this case, the effect may be in the form of an
increase in the deferred tax asset related to our net operating loss carryforwards, which would be offset by a full valuation
allowance. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next twelve
months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash
flows.

We apply the intraperiod tax allocation rules to allocate income taxes among continuing operations, discontinued operations,
other comprehensive income (loss), and additional paid-in capital when we meet the criteria as prescribed in the guidance.

Environmental Matters

We have been named a potentially responsible party ("PRP"), in conjunction with other parties, in a number of cases arising
under an environmental protection law, the Comprehensive Environmental Response, Compensation, and Liability Act,
popularly known as the "Superfund" law. These cases involve sites that allegedly received wastes from current or former
Company locations. Based on information available to us which, in most cases, consists of data related to quantities and
characteristics of material generated at current or former Company locations, material allegedly shipped by us to these disposal
sites, as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable
estimate is calculated of our share, if any, of the probable costs and accruals and is recorded in our consolidated financial
statements. These accruals are generally recognized no later than completion of the remedial feasibility study and are not
discounted to their present value. We review all accruals on a regular basis and believe that, based on these calculations, our
share of the potential additional costs for the cleanup of each site will not have a material effect on our financial condition,
results of operations, or cash flows.

In addition, other sites formerly owned by us or where we are currently operating have been identified as having soil and
groundwater contamination. While investigations and cleanup activities continue at these and other sites, we believe that we
have appropriate accruals to cover costs to complete the cleanup of all sites.

Impact of Environmental Regulation

Government regulation related to climate change is under consideration at the U.S. federal and state levels. Because our
products use fossil fuels, they may be impacted indirectly due to regulation, such as a cap and trade program, affecting the cost
of fuels. The EPA and NHTSA issued final rules for GHG emissions and fuel economy on September 15, 2011. These began to
apply in calendar year 2014 and were fully implemented in model year 2017. The agencies' stated goals for these rules were to
increase the use of currently existing technologies. We are complying with these rules through use of existing technologies and
implementation of emerging technologies as they become available. The EPA and NHTSA adopted a final rule on October 25,
2016 with the next phase of federal GHG emission and fuel economy regulations. This rule contains more stringent emissions
levels for engines and vehicles and will take effect in model year 2021 and be implemented in three stages culminating in
model year 2027. Canada also adopted a heavy duty phase 2 GHG rulemaking aligned with EPA and NHTSA phase 2 rules.

In December 2014, California adopted GHG emission rules for heavy duty vehicles equivalent to EPA phase 1 rules and is in
the process of adopting its phase 2 equivalent rules. California has stated its intention to lower NOx standards for California-
certified engines and has requested that the EPA lower its standards. In June 2016, several regional air quality management
districts in California and other states, as well as the environmental agencies for several states, petitioned the EPA to adopt
lower NOx emission standards for on-road heavy duty trucks and engines. On November 14, 2018 the EPA announced the
“Cleaner Trucks Initiative” which will begin the regulatory process for a reduced NOx emissions regulation while also
streamlining compliance and certification requirements. We will monitor and participate in this rulemaking. EPA and CARB
may also consider other actions, including extended emission warranties. California is currently considering regulatory
requirements to expand the zero emissions truck market, including the mandated sale of certain vehicles.

We expect that heavy duty vehicle and engine fuel economy and GHG emissions rules will be under consideration in other
global jurisdictions in the future. These standards will require significant investments of capital and will significantly increase
costs of development for engines and vehicles, and will require us to incur administrative costs arising from implementation of
the standard. EPA also issued a final rule in October 2015 that lowered the National Ambient Air Quality Standard for ozone to
70 parts per billion. This rule could lead to future lower emission standards for substances that contribute to ozone, including
NOx from vehicles, at the federal and state levels. Our facilities may be subject to regulation related to climate change and
climate change itself may also have some impact on our operations. However, these impacts are currently uncertain and we
cannot predict the nature and scope of those impacts.

These standards will require significant investments of capital, will significantly increase costs of development for engines and
vehicles and will require us to incur administrative costs arising from the implementation of the standards.

Securitization Transactions

None of our securitization or trust arrangements qualify for sales accounting treatment or as an off-balance sheet arrangement.
As a result, the transferred receivables and the associated secured borrowings are included in our Consolidated Balance Sheets
and no gain or loss is recorded for these transactions.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our
consolidated financial statements, we use estimates and make judgments and assumptions about future events that affect the
reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. Our assumptions, estimates, and
judgments are based on historical experience, current trends, and other factors we believe are relevant at the time we prepare
our consolidated financial statements.

Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, to the accompanying
consolidated financial statements and should be reviewed in connection with the following discussion. We believe that the
following policies are the most critical to aid in fully understanding and evaluating our reported results as they require us to
make difficult, subjective, and complex judgments. In determining whether an estimate is critical, we consider if:

•

the nature of the estimate or assumption is material due to the levels of subjectivity and judgment necessary to account for
highly uncertain matters or the susceptibility of such matters to change, or

the impact of the estimate or assumption on financial condition or operating performance is material.

Pension and Other Postretirement Benefits

We provide pension and other postretirement benefits to a substantial portion of our employees, former employees, and their
beneficiaries. The assets, liabilities, and expenses we recognize and disclosures we make about plan actuarial and financial
information are dependent on the assumptions used in calculating such amounts. The primary assumptions include factors such
as discount rates, health care cost trend rates, inflation, expected return on plan assets, retirement rates, mortality rates, rate of

compensation increases, and other factors including management's plans regarding plant rationalization activities. Changes to
our business environment could result in changes to the assumptions, the effects of which could be material.

•

Plant rationalization activities impact the determination of whether a plan curtailment or settlement has occurred. Key
considerations include, but are not limited to, expected future service credit, the remaining years of recall rights of the
workforce, and the extent to which minimum service requirements (in the case of healthcare benefits) have been met.

• The discount rates are obtained by matching the anticipated future benefit payments for the plans to a high quality

corporate bond yield curve to establish a weighted average discount rate for each plan.

• Health care cost trend rates are developed based upon historical retiree cost trend data, short term health care outlook, and

industry benchmarks and surveys. The inflation assumptions used are based upon both our specific trends and nationally
expected trends.

• The expected return on plan assets is derived from historical plan returns, expected long-term performance of asset classes,
asset allocations, input from an external pension investment advisor, and risks and other factors adjusted for our specific
investment strategy. The focus is on long-term trends and provides for the consideration of recent plan performance.

• Retirement rates are based upon actual and projected plan experience.

• Mortality rates are developed from actual and projected plan experience for the U.S. postretirement benefit plans. Our
actuaries conduct an experience study every five years as part of the process to select a best estimate of mortality. We
consider both standard mortality tables and improvement factors as well as the plans’ actual experience when selecting a
best estimate. During 2015, we conducted a new experience study as scheduled and, as a result, updated our mortality
assumptions.

• The rate of compensation increase reflects our long-term actual experience and our projected future increases.

The sensitivities stated below are based upon changing one assumption at a time, but often economic factors impact multiple
assumptions simultaneously.

(in millions)
Discount rate:

October 31, 2018

2019 Expense

Obligations

Pension

OPEB

Pension

OPEB

Increase of 1.0%............................................................................................. $
Decrease of 1.0% ...........................................................................................

(273) $
316

(113) $
134

1
(2)

Expected return on assets:

Increase of 1.0%.............................................................................................
Decrease of 1.0% ...........................................................................................

—

(21)
21

(3)
3

As modeled above, net periodic postretirement benefits expense is not highly sensitive to changes in discount rates in the
current interest rate environment due to the relatively short duration of the closed plans.

Income Taxes

We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences between the financial statement carrying values
of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recorded with respect to net operating
losses and other tax attribute carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for
the years in which temporary differences are expected to be recovered or settled. Valuation allowances are established when,
based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be
realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income from continuing
operations in the period that includes the enactment date.

The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income and other
factors such as the taxing jurisdiction in which the asset is to be recovered. A high degree of judgment is required to determine
if, and the extent to which, valuation allowances should be recorded against deferred tax assets. We have provided valuation
allowances at October 31, 2018 and 2017 aggregating $2.2 billion and $3.3 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.
Although we believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ
and we may be exposed to increases or decreases in income taxes that could be material.

We recognize the tax benefit from an uncertain tax position claimed or expected to be claimed on a tax return only if it is more
likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We recognize interest and penalties
related to uncertain tax positions as part of Income tax expense.

Impairment of Long-Lived Assets

We test long-lived assets (other than goodwill and intangible assets with indefinite lives) or asset groups for recoverability when
events and circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Estimates of
undiscounted future cash flows used to test the recoverability of a long-lived asset or asset group include only the future cash
flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the
asset or asset group. If the asset or asset group is determined to not be recoverable, an impairment loss is measured as the
amount by which the carrying amount of the long-lived asset or asset group exceeds its fair value.

Our impairment loss calculations require us to apply judgments in estimating future cash flows and asset fair values. This
judgment includes developing cash flow projections and, at times, assessing probability weightings to certain business
scenarios. Other long-lived assets could become impaired in the future or require additional charges as a result of declines in
profitability due to changes in volume, market pricing, cost, manner in which an asset is used, expectation of sale or disposal of
an asset, physical condition of an asset, laws and regulations, or the business environment. Significant adverse changes to our
business environment and future cash flows could cause us to record additional impairment charges in future periods, which
could be material.

Revenue

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) collectability is reasonably assured, and (iv) delivery of product
has occurred or services have been rendered. Sales are generally recognized when risk of ownership passes.

Sales arrangements with U.S. fleet customers are often complex and non-standard, and may include pricing allowances and
other sales incentives, such as rebates, financing incentives, and residual value guarantees, for which losses are generally
capped. Sales to fleet customers are recognized in accordance with the terms of each contract. In certain arrangements, the
evaluation of financing incentives and residual value guarantees may result in the transaction being recorded as a borrowing or
operating lease. Concurrent with our recognition of revenue, we recognize price allowances and the cost of incentive programs
in the normal course of business based on programs offered to our fleet customers.

Product Warranty

We generally offer one to five-year warranty coverage for our truck, bus, and engine products, as well as our service parts.
Terms and conditions vary by product, customer, and country. We accrue warranty related costs under standard warranty terms
and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers.

Our warranty estimates are established using historical information about the nature, frequency, timing, and average cost of
warranty claims. Warranty claims are influenced by numerous factors, including new product introductions, technological
developments, the competitive environment, the design and manufacturing process, and the complexity and related costs of
component parts. We estimate our warranty accrual for our engines and trucks based on engine types and model years. Our
warranty accruals take into account the projected ultimate cost-per-unit ("CPU") utilizing historical claims information. The
CPU represents the total cash projected to be spent for warranty claims for a particular model year during the warranty period,
divided by the number of units sold. The projection of the ultimate CPU is affected by component failure rates, repair costs, and
the timing of failures in the product life cycle. Warranty claims inherently have a high amount of variability in timing and
severity and can be influenced by external factors. Our warranty estimation process takes into consideration numerous variables
that contribute to the precision of the estimate, but also add to the complexity of the model. Including numerous variables also
reduces the sensitivity of the model to any one variable. We perform periodic reviews of warranty spend data to allow for
timely consideration of the effects on warranty accruals.

Initial warranty estimates for new model year products are based on the previous model year product's warranty experience
until the new product progresses sufficiently through its life cycle and related claims data becomes mature. Historically,
warranty claims experience for launch-year products has been higher compared to the prior model-year engines; however, over
time we have been able to refine both the design and manufacturing process to reduce both the volume and the severity of

warranty claims. New product launches require a greater use of judgment in developing estimates until historical experience
becomes available.

We record adjustments to pre-existing warranties for changes in our estimate of warranty costs for products sold in prior fiscal
years. Such adjustments typically occur when claims experience deviates from historic and expected trends. During 2018 and
2017, we recognized a benefit for adjustments to pre-existing warranties of $9 million and $1 million, respectively, compared to
a charge of $77 million in 2016.

When we identify cost effective opportunities to address issues in products sold or corrective actions for safety issues, we
initiate product recalls or field campaigns. As a result of the uncertainty surrounding the nature and frequency of product recalls
and field campaigns, the liability for such actions is generally recorded when we commit to a product recall or field campaign.
In each subsequent quarter after a recall or field campaign is initiated the recorded liability balance is analyzed, reviewed, and
adjusted if necessary to reflect any changes in the anticipated average cost of repair or number of repairs to be completed
prospectively. Included in 2018 warranty expense was $10 million of charges related to new field campaign issuances as well as
changes in estimates of previously issued campaigns, as compared to $21 million and $17 million in 2017 and 2016,
respectively. The charges were primarily recognized as adjustments to pre-existing warranties.

As we continue to identify opportunities to improve the design and manufacturing of our engines we may incur additional
charges for product recalls and field campaigns to address identified issues.

Optional extended warranty contracts can be purchased for periods ranging from one to ten years. Warranty revenues related to
extended warranty contracts are amortized to income, over the life of the contract using the straight-line method. Costs under
extended warranty contracts are expensed as incurred. We recognize losses on defined pools of extended warranty contracts
when the expected costs for a given pool of contracts exceed related unearned revenue. In 2018, we recognized a net benefit
of $29 million related to extended warranty contracts on our proprietary Big-Bore engines, which includes a benefit of $33
million related to pre-existing warranties. In 2017, we recognized a net charge of $8 million related to extended warranty
contracts on our proprietary Big-Bore engines, which includes a charge of $3 million related to pre-existing warranties. Future
warranty experience, pricing of extended warranty contracts, and external market factors may cause us to recognize additional
charges as losses on extended service contracts in future periods.

When collection is reasonably assured, we also estimate the amount of warranty claim recoveries to be received from our
suppliers and record them in Other current assets and Other noncurrent assets. Recoveries related to specific product recalls, in
which a supplier confirms its liability under the recall, are recorded in Trade and other receivables, net. Warranty costs and
recoveries are included in Costs of products sold.

Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ and we may
be exposed to increases or decreases in our warranty accrual that could be material.

Recently Issued Accounting Standards

The information required to be set forth under this heading is incorporated by reference from Note 1, Summary of Significant
Accounting Policies, to the consolidated financial statements included in Part II, Item 8.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our primary market risks include fluctuations in interest rates and currency exchange rates. We are also exposed to changes in
the prices of commodities used in our Manufacturing operations. Commodity price risk related to our current commodity
financial instruments are not material. We do not hold a material portfolio of market risk sensitive instruments for trading
purposes.

We have established policies and procedures to manage sensitivity to interest rate and foreign currency exchange rate market
risk. These procedures include the monitoring of our level of exposure to each market risk, the funding of variable rate
receivables primarily with variable rate debt, and limiting the amount of fixed rate receivables that may be funded with floating
rate debt. These procedures also include the use of derivative financial instruments to mitigate the effects of interest rate
fluctuations and to reduce our exposure to exchange rate risk.

Interest rate risk

Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. We measure our interest
rate risk by estimating the net amount by which the fair value of all of our interest rate sensitive assets and liabilities would be
impacted by selected hypothetical changes in market interest rates. At both October 31, 2018 and 2017, the net fair value of our
liabilities with exposure to interest rate risk was $5 billion. Assuming a hypothetical instantaneous 10% adverse change in
interest rates as of October 31, 2018 and 2017, the fair value of these liabilities would increase by $139 million and $91 million,
respectively. At both October 31, 2018 and 2017, the net fair value of our assets with exposure to interest rate risk was $2
billion. Assuming a hypothetical instantaneous 10% adverse change in interest rates as of October 31, 2018 and 2017, the fair
value of these assets would decrease by $4 million for both periods.

Commodity price risk

We are exposed to changes in the prices of commodities, particularly for aluminum, copper, precious metals, resins, diesel fuel,
and steel and their impact on the acquisition cost of various parts used in our Manufacturing operations. We have been able to
mitigate the effects of price increases via a combination of design changes, material substitution, global sourcing, and price
performance. In certain cases, we use derivative instruments to reduce exposure to price changes. During 2018 and 2017, we
purchased approximately $403 million and $376 million, respectively, of commodities subject to market risk. Assuming a
hypothetical instantaneous 10% adverse change in commodity pricing, we would have incurred additional costs of $40 million
and $38 million in 2018 and 2017, respectively. Commodity price risk associated with our derivative position at October 31,
2018 and 2017 is not material to our operating results or financial position.

Foreign currency risk

Foreign currency risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates.
Our primary exposures to foreign currency exchange rate fluctuations are the Canadian dollar/U.S. dollar, Mexican peso/
U.S. dollar, euro/U.S. dollar, and Brazilian real/U.S. dollar. At October 31, 2018 and 2017, the net fair value of our liabilities
with exposure to foreign currency risk was $260 million and $238 million, respectively. Assuming that no offsetting derivative
financial instruments exist, the reduction in earnings from a hypothetical instantaneous 10% adverse change in quoted foreign
currency spot rates applied to foreign currency sensitive instruments would be $26 million and $24 million at October 31, 2018
and 2017, respectively. At October 31, 2018 and 2017, the net fair value of our assets with exposure to foreign currency risk
was $180 million and $168 million, respectively. Assuming that no offsetting derivative financial instruments exist, the
reduction in earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to
foreign currency sensitive instruments would be $18 million and $17 million at October 31, 2018 and 2017, respectively.

For further information regarding fair value estimates, please see Note 12, Fair Value Measurements to the accompanying
consolidated financial statements.

Item 8.

Financial Statements

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm ..................................................................................................
Consolidated Statements of Operations for the years ended October 31, 2018, 2017, and 2016..........................................
Consolidated Statements of Comprehensive Income (loss) for the years ended October 31, 2018, 2017, and 2016 ...........
Consolidated Balance Sheets as of October 31, 2018 and 2017............................................................................................
Consolidated Statements of Cash Flows for the years ended October 31, 2018, 2017, and 2016.........................................
Consolidated Statements of Stockholders' Deficit for the years ended October 31, 2018, 2017, and 2016..........................

Notes to Consolidated Financial Statements

1
2

Summary of Significant Accounting Policies ................................................................................................................
Restructurings and Impairments ....................................................................................................................................
3
Finance Receivables.......................................................................................................................................................
4 Allowance for Doubtful Accounts .................................................................................................................................
Inventories......................................................................................................................................................................
5
6
Property and Equipment, Net.........................................................................................................................................
7 Goodwill and Other Intangible Assets, Net ...................................................................................................................
Investments in Non-consolidated Affiliates...................................................................................................................
8
9 Debt................................................................................................................................................................................
10 Postretirement Benefits..................................................................................................................................................
11 Income Taxes .................................................................................................................................................................
12 Fair Value Measurements...............................................................................................................................................
13 Commitments and Contingencies ..................................................................................................................................
14 Segment Reporting.........................................................................................................................................................
15 Stockholders' Deficit......................................................................................................................................................
16 Earnings (Loss) Per Share Attributable to Navistar International Corporation .............................................................
17 Stock-based Compensation Plans ..................................................................................................................................
18 Supplemental Cash Flow Information ...........................................................................................................................
19 Selected Quarterly Financial Data (Unaudited).............................................................................................................
20 Subsequent Events .........................................................................................................................................................

Page
58

65
76

102

105

115

118

120

122

128

129

130

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Navistar International Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Navistar International Corporation and subsidiaries (the
Company) as of October 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss),
stockholders’ deficit, and cash flows for each of the years in the three year period ended October 31, 2018, and the related
notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of October 31, 2018 and 2017, and the results of its operations
and its cash flows for each of the years in the three year period ended October 31, 2018, in conformity with U.S. generally
accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of October 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated December 18, 2018 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.

We have served as the Company’s auditor since 2006.

Chicago, Illinois
December 18, 2018

/s/ KPMG LLP

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Navistar International Corporation:

Opinion on Internal Control Over Financial Reporting

We have audited Navistar International Corporation’s and subsidiaries’ (the Company) internal control over financial reporting
as of October 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of October 31, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of October 31, 2018 and 2017, the related consolidated
statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for each of the years in the three-
year period ended October 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report
dated December 18, 2018 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Chicago, Illinois
December 18, 2018

Navistar International Corporation and Subsidiaries
Consolidated Statements of Operations

For the Years Ended October 31,

2018

2017

2016

(in millions, except per share data)
Sales and revenues

Sales of manufactured products, net ................................................................................ $ 10,090
160
Finance revenues ..............................................................................................................
Sales and revenues, net................................................................................................

10,250

8,428

7,976

142

8,570

135

8,111

Costs and expenses

Costs of products sold ......................................................................................................
Restructuring charges .......................................................................................................
Asset impairment charges ................................................................................................
Selling, general and administrative expenses...................................................................
Engineering and product development costs....................................................................
Interest expense ................................................................................................................
Other income, net .............................................................................................................
Total costs and expenses..............................................................................................
Equity in income of non-consolidated affiliates......................................................................
Income (loss) from continuing operations before income taxes .............................................
Income tax expense .................................................................................................................
Income (loss) from continuing operations...............................................................................
Income from discontinued operations, net of tax ....................................................................
Net income (loss).....................................................................................................................
Less: Net income attributable to non-controlling interests......................................................
Net income (loss) attributable to Navistar International Corporation............................. $

8,317
(1)
14

922

297

327
(46)
9,830

—

420
(52)
368

—

368

340

Amounts attributable to Navistar International Corporation common shareholders:
Income (loss) from continuing operations, net of tax.............................................................. $
Income from discontinued operations, net of tax ....................................................................

Net income (loss) ............................................................................................................. $

340

—

340

Earnings (loss) per share:

Basic:

Continuing operations ............................................................................................... $
Discontinued operations............................................................................................

3.44

—

3.44

Diluted:

Weighted average shares outstanding:

Basic .................................................................................................................................
Diluted..............................................................................................................................

3.41
—

3.41

98.9
99.6

7,037

6,812

878

251

351
(21)
8,512

64
(10)
54

0.31
0.01

0.32

0.31
0.01

0.32

93.0

93.5

802

247

327
(76)
8,149

6
(32)
(33)
(65)
—
(65)
32
(97)

(97)
—
(97)

(1.19)
—
(1.19)

81.7

Navistar International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)

(in millions)
Net income (loss)...................................................................................................................... $
Other comprehensive income (loss):

Foreign currency translation adjustment ...........................................................................
Unrealized gain on marketable securities, net of tax.........................................................
Defined benefit plans, net of tax........................................................................................
Total other comprehensive income (loss).................................................................................
Comprehensive income (loss)...................................................................................................
Less: Net income attributable to non-controlling interests.......................................................
Total comprehensive income (loss) attributable to Navistar International Corporation. $

For the Years Ended October 31,

2018

2017

2016

368

(65)

(32)
—

323

291

659

(3)
(1)
433

429

484

631

459

—
(46)
(39)
(104)
32
(136)

Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets

As of October 31,

2018

2017

(in millions, except per share data)
ASSETS

Current assets

Cash and cash equivalents ........................................................................................................ $
Restricted cash and cash equivalents........................................................................................
Marketable securities ................................................................................................................
Trade and other receivables, net ...............................................................................................
Finance receivables, net............................................................................................................
Inventories, net .........................................................................................................................
Other current assets...................................................................................................................
Total current assets ............................................................................................................
Restricted cash .................................................................................................................................
Trade and other receivables, net ......................................................................................................
Finance receivables, net ...................................................................................................................
Investments in non-consolidated affiliates.......................................................................................
Property and equipment, net ............................................................................................................
Goodwill ..........................................................................................................................................
Intangible assets, net ........................................................................................................................
Deferred taxes, net ...........................................................................................................................
Other noncurrent assets....................................................................................................................

Total assets........................................................................................................................ $

1,320
62
101
456
1,898
1,110
189
5,136
63
49
260
50
1,370
38
30
121
113
7,230

LIABILITIES 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.....................................................................................................
Other noncurrent liabilities ..............................................................................................................
Total liabilities.........................................................................................................................

946
1,606
1,255
3,807
4,521
2,097
731
11,156

Stockholders’ deficit

706
83
370
391
1,565
857
188
4,160
51
13
220
56
1,326
38
40
129
102
6,135

1,169
1,292
1,184
3,645
3,889
2,497
678
10,709

Series D convertible junior preference stock ...................................................................................
Common stock, $0.10 par value per share (103.1 shares issued and 220 shares authorized at
both dates)........................................................................................................................................
Additional paid-in capital ................................................................................................................
Accumulated deficit .........................................................................................................................
Accumulated other comprehensive loss...........................................................................................
Common stock held in treasury, at cost (4.2 and 4.6 shares, respectively) .....................................
Total stockholders’ deficit attributable to Navistar International Corporation .........................
Stockholders’ equity attributable to non-controlling interests .........................................................
Total stockholders’ deficit ......................................................................................................

Total liabilities and stockholders’ deficit ....................................................................... $

10
2,731
(4,593)
(1,920)
(161)
(3,931)
5
(3,926)
7,230

10
2,733
(4,933)
(2,211)
(179)
(4,578)
4
(4,574)
6,135

See Notes to Consolidated Financial Statements
62

Navistar International Corporation and Subsidiaries
Consolidated Statements of Cash Flows

(in millions)

Cash flows from operating activities

For the Years Ended October 31,

2018

2017

2016

Net income (loss)........................................................................................................................................................ $
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

368

(65)

Depreciation and amortization ..........................................................................................................................

140

150

Depreciation of equipment leased to others ......................................................................................................

Deferred taxes, including change in valuation allowance .................................................................................

Asset impairment charges..................................................................................................................................

Loss (gain) on sales of investments and businesses, net ...................................................................................

Amortization of debt issuance costs and discount.............................................................................................

Stock-based compensation ................................................................................................................................

Provision for doubtful accounts, net of recoveries............................................................................................

Equity in income of non-consolidated affiliates, net of dividends....................................................................

Write-off of debt issuance cost and discount.....................................................................................................

—

(6)

(5)

146

(9)

—

Other non-cash operating activities...................................................................................................................

(23)

(28)

(12)

Changes in other assets and liabilities, exclusive of the effects of businesses 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 of marketable securities ....................................................................................................................................

Maturities of marketable securities ............................................................................................................................

Net change in restricted cash and cash equivalents....................................................................................................

Capital expenditures ...................................................................................................................................................

Purchases of equipment leased to others....................................................................................................................
Proceeds from sales of property and equipment ........................................................................................................

Investments in non-consolidated affiliates .................................................................................................................

Proceeds from (payments for) sales of affiliates ........................................................................................................
Net cash used in investing activities...............................................................................................................

Cash flows from financing activities

Proceeds from issuance of securitized debt................................................................................................................

Principal payments on securitized debt ......................................................................................................................

Net change in secured revolving credit facilities .......................................................................................................

Proceeds from issuance of non-securitized debt ........................................................................................................

Principal payments on non-securitized debt...............................................................................................................

Net change in notes and debt outstanding under revolving credit facilities...............................................................

Principal payments under financing arrangements and capital lease obligations ......................................................

Debt issuance costs.....................................................................................................................................................

Proceeds from financed lease obligations ..................................................................................................................

Issuance of common stock .........................................................................................................................................

Stock issuance costs ...................................................................................................................................................

Proceeds from exercise of stock options ....................................................................................................................

Dividends paid by subsidiaries to non-controlling interest ........................................................................................

Other financing 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 ...........................................................................................................

Cash and cash equivalents at beginning of the year.......................................................................................................

(109)

(405)

(257)

317

269

(251)

460

(113)

(232)
11

—

(3)

(59)

339

(364)

135
3,248
(2,920)

(10)

—

(41)

—

(27)

(17)

414

(10)

614

706

Cash and cash equivalents at end of the year ................................................................................................................. $

1,320

(125)

(123)

159

(226)

109

(1,011)

659

(22)

(102)

(137)
35

(1)

(542)

322

(336)

111

582

(489)

(112)

—

(29)

256

(11)

(26)

(3)
338

(3)

(98)

804

706

134

251

205

(193)

(370)

267

(485)

555

(116)

(132)
24

(2)

(67)

413

(346)

(148)

222

(315)

(149)

(3)

(16)

—

(34)

1
(353)

(108)

912

804

See Notes to Consolidated Financial Statements
63

Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Deficit

Series D
Convertible
Junior
Preference
Stock

Common
Stock

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Common
Stock
Held in
Treasury,
at cost

Stockholders'
Equity
Attributable
to Non-
controlling
Interests

(in millions)

Balance as of October 31, 2015

Net income (loss) .....................................

Total other comprehensive loss................

Stock-based compensation.......................

Stock ownership programs.......................

Cash dividends paid to non-controlling
interest......................................................
Acquisition of remaining ownership
interest from non-controlling interest
holder .......................................................

Balance as of October 31, 2016

Net income ...............................................

Total other comprehensive income ..........

Stock-based compensation.......................

Stock ownership programs.......................

Cash dividends paid to non-controlling
interest......................................................

Issuance of common stock .......................

Stock issuance costs.................................

Other ........................................................

Balance as of October 31, 2017

Net income ...............................................

Total other comprehensive income ..........

Stock-based compensation.......................

Stock ownership programs.......................

Cash dividends paid to non-controlling
interest......................................................

Issuance of common stock .......................

Stock issuance costs.................................

Stock deferral and issuance - directors ....

Other ........................................................

Balance as of October 31, 2018 ................... $

—

(1)

—

2,499

(4,866) $

(2,601) $

(210) $

—

(5)

—

(97)

—

(39)

—

2,499

(4,963) $

(2,640) $

(205) $

—

(15)

—

254

(11)

—

429

—

2,733

(4,933) $

(2,211) $

(179) $

—

(11)

—

(1)

—

340

—

291

—

2,731

(4,593) $

(1,920) $

(161) $

—

(34)

—

(26)

—

(27)

—

Total

$ (5,160)

(65)

(39)

—

(34)

$ (5,293)

429

(26)

256

(11)

(1)

$ (4,574)

368

291

(27)

—

(1)

—

$ (3,926)

See Notes to Consolidated Financial Statements
64

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Organization and Description of the Business

Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company
whose principal operating entities are Navistar, Inc. ("NI") and Navistar Financial Corporation ("NFC"). References herein to
the "Company," "we," "our," or "us" refer collectively to NIC and its consolidated subsidiaries, including certain variable
interest entities ("VIEs") of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Parts,
Global Operations (collectively called "Manufacturing operations"), and Financial Services, which consists of NFC and our
foreign finance operations (collectively called "Financial Services operations"). These segments are discussed in Note 14,
Segment Reporting.

Our fiscal year ends on October 31. As such, all references to 2018, 2017, and 2016 contained within this Annual Report on
Form 10-K relate to the fiscal year, unless otherwise indicated.

Basis of Presentation and Consolidation

The accompanying audited consolidated financial statements include the assets, liabilities, and results of operations of our
Manufacturing operations, which include majority-owned dealers ("Dealcors"), and our Financial Services operations,
including VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been
eliminated to arrive at the consolidated amounts.

Variable Interest Entities

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

We are the primary beneficiary of our Blue Diamond Parts, LLC ("BDP") joint venture with Ford Motor Company ("Ford"). As
a result, our Consolidated Balance Sheets include assets of $39 million and $49 million and liabilities of $4 million and $13
million as of October 31, 2018 and 2017, respectively, including $4 million and $10 million of cash and cash equivalents, at the
respective dates, which are not readily available to satisfy claims against our general assets. The creditors of BDP do not have
recourse to our general credit.

Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets
of $994 million and $869 million as of October 31, 2018 and 2017, respectively, and liabilities of $852 million and $754
million as of October 31, 2018 and 2017, respectively, all of which are involved in securitizations that are treated as asset-
backed debt. In addition, our Consolidated Balance Sheets include secured assets of $370 million and $278 million as of
October 31, 2018 and 2017, respectively, and corresponding liabilities of $205 million and $194 million, at the respective dates,
which are related to other secured transactions that do not qualify for sale accounting treatment, and therefore, are treated as
borrowings secured by operating and finance leases. Investors that hold securitization debt have a priority claim on the cash
flows generated by their respective securitized assets to the extent that the related VIEs are required to make principal and
interest payments. Investors in securitizations of these entities have no recourse to our general credit.

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

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

Related Party Transactions

We have a series of commercial relationships and agreements with TRATON AG (formerly Volkswagen Truck & Bus AG) and
certain of its subsidiaries and affiliates ("TRATON Group") for royalties related to use of certain engine technology, contract

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

manufacturing operations performed by us, the sale of engines, the sale and purchase of parts, and a procurement joint venture.
We have also entered into development agreements with TRATON Group involving certain engine and transmission projects.
This development work is being expensed as incurred. Revenue recognized for the years ended October 31, 2018 and 2017, was
approximately $146 million and $119 million, respectively. Net expenses incurred for the years ended October 31, 2018 and
2017 were $27 million and $7 million, respectively, included primarily in Engineering and product development costs in our
Consolidated Statements of Operations. Our receivable from TRATON Group was $10 million and $13 million as of October
31, 2018 and 2017, respectively. Our payable to TRATON Group was $25 million and $5 million as of October 31, 2018 and
2017, respectively.

Revenue Recognition

Sales to fleet customers and governmental entities are recognized in accordance with the terms of each contract. Revenue on
certain customer requested bill and hold arrangements is not recognized until after the customer is notified that the product
(i) has been completed according to customer specifications, (ii) has passed our quality control inspections, and (iii) is ready for
delivery based upon the established delivery terms and risk of loss has transferred.

An allowance for sales returns is recorded as a reduction to revenue based upon estimates using historical information about
returns. For the sale of service parts that include a component, we record revenue on a gross basis including the fair market
value of the core. A core component is the basic forging or casting, such as an engine block, that can be remanufactured by a
certified remanufacturing supplier. When a dealer returns a core within the specified eligibility period, we provide a core return
credit, which is applied to the customer's account balance. At times, we may mark up the core charge beyond the amount we are
charged by the supplier. This mark-up is recorded as a liability, as it represents the amount that will be paid to the dealer upon
return of the core 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 or fleet customers. Estimates are made for sales incentives on certain
vehicles in dealer stock inventory based on historical experience and announced special programs. Historically, we have had an
increase in net orders for stock inventory from our dealers at the end of the year due to a combination of demand and, from time
to time, incentives to dealers.

Truck sales to the U.S. and foreign governments of non-commercial products manufactured to government specifications, and
other contract manufacturing arrangements, are recognized using the units-of-delivery measure under the percentage-of-
completion accounting method as units are delivered and accepted, if required, by the customer.

Certain terms or modifications to U.S. and foreign government contracts may be unpriced; that is, the work to be performed is
defined, but the related contract price is to be negotiated at a later date. In situations where we can reliably estimate a profit
margin in excess of costs incurred, revenue and gross margin are recorded for delivered contract items. Otherwise, revenue is
recognized when the price has been agreed with the government and costs are deferred when it is probable that the costs will be
recovered.

Shipping and handling amounts billed to our customers are included in Sales of manufactured products, net and the related
shipping and handling costs incurred are included in Costs of products sold.

Financial Services operations recognize revenue from retail notes, finance leases, wholesale notes, retail accounts, and
wholesale accounts as Finance revenues over the term of the receivables utilizing the effective interest method. Certain direct
origination costs and fees are deferred and recognized as adjustments to yield and are reported as part of interest income over
the life of the receivable. Loans are considered to be impaired when we conclude it is probable the customer will not be able to
make full payment according to contractual terms after reviewing the customer's financial performance, payment ability,
capital-raising potential, management style, economic situation, and other factors. The accrual of interest on such loans is
discontinued when the loan becomes 90 days or more past due. Finance revenues on these loans are recognized only to the
extent cash payments are received. We resume accruing interest on these accounts when payments are current according to the
terms of the loans and future payments are reasonably assured.

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.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Selected receivables are securitized and sold to public and private investors with limited recourse. Our Financial Services
operations continue to service the sold receivables. These transactions do not qualify for sale accounting under U.S. GAAP and
are therefore accounted for as secured borrowing transactions.

Cash and Cash Equivalents

All highly liquid financial instruments with original maturities of 90 days or less, consisting primarily of U.S. Treasury bills,
federal agency securities, and commercial paper, are classified as cash equivalents.

Restricted cash is related to our securitization facilities, senior and subordinated floating rate asset-backed notes, wholesale
trust agreements, indentured trust agreements, letters of credit, Environmental Protection Agency ("EPA") requirements, and
workers compensation requirements. The restricted cash and cash equivalents for our securitized facilities are restricted to pay
interest expense, principal, or other amounts associated with our securitization agreements.

Marketable Securities

Marketable securities consist of available-for-sale securities and are measured and reported at fair value. The difference
between amortized cost and fair value is recorded as a component of Accumulated other comprehensive loss ("AOCL") in
Stockholders' Deficit, net of taxes. Most securities with remaining maturities of less than twelve months and other investments
needed for current cash requirements are classified as current in our Consolidated Balance Sheets. Gains and losses on the sale
of marketable securities are determined using the specific identification method and are recorded in Other income, net.

We evaluate our investments in marketable securities at the end of each reporting period to determine if a decline in fair value is
other than temporary. When a decline in fair value is determined to be other than temporary, an impairment charge is recorded
and a new cost basis in the investment is established. Our marketable securities are classified as Level 1 in the fair value
hierarchy.

Derivative Instruments

We utilize derivative instruments to manage certain exposure to changes in foreign currency exchange rates, interest rates, and
commodity prices. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date.
Changes in the fair value of these derivative instruments are recognized in our operating results or included in AOCL,
depending on whether the derivative instrument is a fair value or cash flow hedge and whether it qualifies for hedge accounting
treatment. We elected to apply the normal purchase and normal sale exclusion to certain commodity contracts that are entered
into to be used in production within a reasonable time during the normal course of business. For the years ended October 31,
2018, 2017, and 2016, we elected not to use hedge accounting and all changes in the fair value of our derivatives, except for
those qualifying under the normal purchases and normal sales exception, were recognized in our operating results.

Gains and losses on derivative instruments are recognized in Costs of products sold, Interest expense, or Other income, net
depending on the underlying exposure. The exchange of cash associated with derivative transactions is classified in the
Consolidated Statements of Cash Flows in the same category as the cash flows from the items subject to the economic hedging
relationships.

Trade and Finance Receivables

Trade Receivables

Trade accounts receivable and trade notes receivable primarily arise from sales of goods to independently owned and operated
dealers, original equipment manufacturers ("OEMs"), and commercial customers in the normal course of business.

Finance Receivables

Finance receivables consist of the following:

• Retail notes—Retail notes primarily consist of fixed rate loans to commercial customers to facilitate their purchase of new

and used trucks, and related equipment.

• Finance leases—Finance leases consist of direct financing leases to commercial customers for acquisition of new and

used trucks, and related equipment.

• Wholesale notes—Wholesale notes primarily consist of variable rate loans to our dealers for the purchase of new and used

trucks, and related equipment.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

• Retail accounts—Retail accounts consist of short-term accounts receivable that finance the sale of products to commercial

customers.

• Wholesale accounts—Wholesale accounts consist of short-term accounts receivable primarily related to the sales of items

other than trucks, and related equipment (e.g. service parts) to dealers.

Finance receivables are classified as held-to-maturity and are recorded at gross value less unearned income and are reported net
of allowances for doubtful accounts. Unearned revenue is amortized to revenue over the life of the receivable using the
effective interest method. Our Financial Services operations purchase the majority of the wholesale notes receivable and some
retail notes and accounts receivable arising from our Manufacturing operations. The Financial Services operations retain as
collateral a security interest in the equipment associated with retail notes, wholesale notes, and finance leases.

Sales of Trade and Finance Receivables

We sell finance receivables using a process commonly known as securitization, whereby asset-backed securities are sold via
public offering or private placement. None of our securitizations qualify for sales accounting treatment or as an off-balance
sheet arrangement. As a result, the transferred receivables and the associated secured borrowings are included in our
Consolidated Balance Sheets and no gain or loss is recorded on the sale.

We also act as servicer of transferred receivables. The servicing duties include collecting payments on receivables and
preparing monthly investor reports on the performance of the receivables that are used by the trustee to distribute monthly
interest and principal payments to investors. While servicing the receivables, we apply the same servicing policies and
procedures that are applied to our owned receivables.

On a limited basis, we have sold certain receivables to third party lenders, without recourse or future obligations, and generally
with no gain or loss.

Allowance for Doubtful Accounts

An allowance for doubtful accounts is established through a charge to Selling, general and administrative ("SG&A") expenses.
The allowance is an estimate of the amount required to absorb probable losses on trade and finance receivables that may
become uncollectible. The receivables are charged off when amounts due are determined to be uncollectible.

We have two portfolio segments of finance receivables based on the type of financing inherent to each portfolio. The retail
portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment
represents loans to dealers to finance their inventory. As the initial measurement attributes and the monitoring and assessment
of credit risk or the performance of the receivables are consistent within each of our receivable portfolios, we determined that
each portfolio consisted of one class of receivable.

Impaired receivables are specifically identified and segregated from the remaining portfolio. The expected loss on impaired
receivables is fully reserved in a separate calculation as a specific reserve based on the unique ability of the customer to pay and
the estimated value of the collateral. The historical loss experience and portfolio quality trends of the retail portfolio segment
compared to the wholesale portfolio segment are inherently different. A specific reserve on impaired retail receivables is
recorded if the estimated fair value of the underlying collateral, net of selling costs, is less than the principal balance of the
receivable. We calculate a general reserve on the remaining loan portfolio by applying loss ratios which are determined using
actual loss experience and customer payment history, in conjunction with current economic and portfolio quality trends. In
addition, we analyze specific economic indicators such as tonnage, fuel prices, and gross domestic product for additional
insight into the overall state of the economy and its potential impact on our portfolio.

To establish a specific reserve for impaired wholesale receivables, we consider the same factors discussed above but also
consider the financial strength of the dealer and key management, the timeliness of payments, the number and location of
satellite locations, the number of dealers of competitor manufacturers in the market area, the type of equipment normally
financed, and the seasonality of the business.

Repossessions

Gains or losses arising from the sale of repossessed collateral supporting finance receivables and operating leases are
recognized in Other income, net. Repossessed assets are recorded within Inventories at the lower of historical cost or fair value,
less estimated costs to sell.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Inventories

Inventories are valued at the lower of cost or net realizable value ("NRV"). Cost is principally determined using the first-in,
first-out method. Our gross used truck inventory was $154 million at October 31, 2018 compared to $206 million at October 31,
2017, offset by reserves of $31 million and $110 million, respectively.

In valuing our used truck inventory, we are required to make assumptions regarding the level of reserves required to value
inventories at their NRV. Our judgments and estimates for used truck inventory are based on an analysis of current and
forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. The NRV is
subject to change based on numerous conditions, including age, specifications, mileage, timing of sales, market mix and current
and forecasted pricing. While calculations are made after taking these factors into account, significant management judgment
regarding expectations for future events is involved. Future events that could significantly influence our judgment and related
estimates include general economic conditions in markets where our products are sold, actions of our competitors, and the
ability to sell used trucks in a timely manner.

The following table presents our used truck reserve:

(in millions)
Balance at beginning of period................................................................................................. $
Additions charged to expense(A)........................................................................................
Deductions/Other adjustments(B).......................................................................................
Balance at end of period........................................................................................................... $

_________________________

For the Years Ended October 31,

2018

2017

2016

110

208

50
(129)
31

111
(209)
110

110

187
(89)
208

(A)

Additions charged to expense reflects the increase of the reserve for inventory on hand. During 2017, we implemented a shift in market mix to
include an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and
lower domestic pricing to enable higher sales velocity.

(B)

Deductions/Other adjustments include reductions of the reserve related to the sale of units.

Property and Equipment

We report land, buildings, leasehold improvements, machinery and equipment (including tooling and pattern equipment),
furniture, fixtures, and equipment, and equipment leased to others at cost, net of depreciation. We initially record assets under
capital lease obligations at the lower of their fair value or the present value of the aggregate future minimum lease payments.
We depreciate our assets using the straight-line method over the shorter of the lease term or the estimated useful lives of the
assets.

The ranges of estimated useful lives are as follows:

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 an adjustment to the depreciation and amortization period or to the
unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets.

We depreciate trucks, tractors, and trailers leased to customers under operating lease agreements on a straight-line basis to the
equipment's estimated residual value over the lease term. The residual values of the equipment represent estimates of the value
of the assets at the end of the lease contracts and are initially recorded based on estimates of future market values. Realization
of the residual values is dependent on our future ability to market the equipment. We review residual values periodically to
determine that recorded amounts are appropriate and the equipment is not impaired.

Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements
that increase the estimated useful life or productive capacity of an asset and we capitalize interest on major construction and
development projects while in progress.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Gains or losses on disposition of property and equipment are recognized in Other income, net.

We test for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an
asset or asset group (hereinafter referred to as "asset group") may not be recoverable by comparing the sum of the estimated
undiscounted future cash flows expected to result from the operation of the asset group and its eventual disposition to the
carrying value. During 2017, we identified a triggering event related to continued economic weakness in Brazil which resulted
in the decline in forecasted results for the Brazilian asset group. The Brazilian asset group is included in our Global Operations
segment. As a result, we estimated the recoverable amount of the asset group and determined that the sum of the estimated
undiscounted future cash flows exceeds the carrying value and the asset group was not impaired. Significant adverse changes to
our business environment and future cash flows could cause us to record impairment charges in future periods, which could be
material.

Included in equipment leased to others are trucks that we produced or acquired to lease to customers as well as equipment that
is financed by BMO that does not qualify for revenue recognition, as we retained substantial risks of ownership in the leased
property, which are accounted for as operating leases and borrowings, respectively. In the Consolidated Statement of Cash
Flows, the related expenditures are reflected as the Purchases of equipment leased to others in the investing section.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of the cost of an acquired business over the amounts assigned to the net assets. Goodwill is not
amortized but is tested for impairment at a reporting unit level on an annual basis or more frequently, if circumstances change
or an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Qualitative factors may be assessed to determine whether it is more likely than not that the fair value of the reporting unit is less
than its carrying amount. If the qualitative assessment indicates that the carrying amount is more likely than not higher than the
fair value, goodwill is tested for impairment based on a two-step test. The first step compares the fair value of a reporting unit
with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount
of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount
of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss shall be recognized in an amount equal to that excess.

Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow
projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and
market conditions, and selecting an appropriate control premium. The income approach is based on discounted cash flows
which are derived from internal forecasts and economic expectations for each respective reporting unit.

An intangible asset determined to have an indefinite useful life is not amortized until its useful life is determined to no longer
be indefinite. Indefinite-lived intangible assets are evaluated each reporting period to determine whether events and
circumstances continue to support an indefinite useful life. Indefinite-lived intangible assets are tested for impairment annually
or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists
of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount of an
indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Significant judgment is applied when evaluating if an intangible asset has a finite useful life. In addition, for indefinite-lived
intangible assets, significant judgment is applied in testing for impairment. This judgment includes developing cash flow
projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic
and market conditions.

Intangible assets subject to amortization are also evaluated for impairment periodically or when indicators of impairment are
determined to exist. We test for impairment of intangible assets, subject to amortization, by comparing the sum of the estimated
undiscounted future cash flows expected to result from the operation of the asset group and its eventual disposition to the
carrying value. If the sum of the undiscounted future cash flows is less than the carrying value, the fair value of the asset group
is determined. The amount of impairment is calculated by subtracting the fair value of the asset group from the carrying value
of the asset group. Intangible assets, subject to amortization, could become impaired in the future or require additional charges
as a result of declines in profitability due to changes in volume, market pricing, cost, manner in which an asset is used, physical
condition of an asset, laws and regulations, or the business environment. We amortize the cost of intangible assets over their
respective estimated useful lives, generally on a straight-line basis.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The ranges for the amortization periods are generally as follows:

Customer base and relationships ..................................................................................................................................
Trademarks ...................................................................................................................................................................
Other .............................................................................................................................................................................

Years
3 - 15

3 - 18

During the third quarter of 2016, the economic downturn in Brazil resulted in the continued decline in actual and forecasted
results for the Brazilian engine reporting unit with an indefinite-lived intangible asset. As a result, we performed an impairment
analysis in the third quarter of 2016 utilizing the income approach, based on discounted cash flows, which are derived from
internal forecasts and economic expectations. It was determined that the carrying value of the trademark exceeded its fair value.
As a result, we determined that the trademark was impaired and recognized an impairment charge of $1 million. The non-cash
impairment charges were included in Asset impairment charges in our Consolidated Statements of Operations. The Brazilian
engine reporting unit is included in our Global Operations segment.

Investments in Non-consolidated Affiliates

Equity method investments are recorded at original cost and adjusted periodically to recognize (i) our proportionate share of the
investees' net income or losses after the date of investment, (ii) additional contributions made and dividends or distributions
received, and (iii) impairment losses resulting from adjustments to fair value.

We assess the potential impairment of our equity method investments and determine fair value based on valuation
methodologies, as appropriate, including the present value of estimated future cash flows, estimates of sales proceeds, and
market multiples. If an investment is determined to be impaired and the decline in value is other than temporary, we record an
appropriate write-down.

Debt Issuance Costs

We amortize debt issuance costs, discounts and premiums over the remaining life of the related debt using the effective interest
method. The related income or expense is included in Interest expense. We record debt issuance costs, discounts and premiums
associated with term debt as a direct deduction from, or addition to, the face amount of the debt. We record debt issuance costs
associated with line-of-credit debt as other assets.

Pensions and Postretirement Benefits

We use actuarial methods and assumptions to account for our pension plans and other postretirement benefit plans. Pension and
other postretirement benefits expense includes the actuarially computed cost of benefits earned during the current service
period, the interest cost on accrued obligations, the expected return on plan assets, the straight-line amortization of net actuarial
gains and losses and plan amendments, and adjustments due to settlements and curtailments.

Engineering and Product Development Costs

Engineering and product development costs arise from ongoing costs associated with improving existing products and
manufacturing processes and for the introduction of new truck and engine components and products, and are expensed as
incurred.

Advertising Costs

Advertising costs are expensed as incurred and are included in SG&A expenses. These costs totaled $31 million, $26 million,
and $13 million for the years ended October 31, 2018, 2017, and 2016, 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 contingencies, as we believe we can
reasonably estimate those costs. In all other instances, legal fees are expensed as incurred. These expenses may be recorded in
Costs of products sold, SG&A expenses, or Other income, net. These estimates are based on our expectations of the scope,
length to complete, and complexity of the claims. In the future, additional adjustments may be recorded as the scope, length, or
complexity of outstanding litigation changes.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Warranty

We record adjustments to pre-existing warranties for changes in our estimate of warranty costs for products sold in prior fiscal
years. Such adjustments typically occur when claims experience deviates from historic and expected trends. For 2018 and 2017,
we recognized a benefit to pre-existing warranties of $9 million and $1 million, respectively, as compared to charges of $77
million in 2016. Future events and circumstances could materially change these estimates and require additional adjustments to
our liability.

When we identify cost effective opportunities to address issues in products sold or corrective actions for safety issues, we
initiate product recalls or field campaigns. As a result of the uncertainty surrounding the nature and frequency of product recalls
and field campaigns, the liability for such actions are generally recorded when we commit to a product recall or field campaign.
Each subsequent quarter after a recall or campaign is initiated the recorded liability balance is analyzed, reviewed, and adjusted
if necessary to reflect any changes in the anticipated average cost of repair or number of repairs to be completed prospectively.
Included in 2018 warranty expense were $10 million of charges related to new campaign issuances as well as changes in
estimates of previously issued campaigns, as compared to $21 million and $17 million in 2017 and 2016, respectively. The
charges were primarily recognized as adjustments to pre-existing warranties. As we continue to identify opportunities to
improve the design and manufacturing of our engines we may incur additional charges for product recalls and field campaigns
to address identified issues.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Product Warranty Liability

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

(in millions)
Balance at beginning of period.................................................................................................. $
Costs accrued and revenues deferred .................................................................................
Currency translation adjustment.........................................................................................
Adjustments to pre-existing warranties(A) ..........................................................................
Payments and revenues recognized....................................................................................
Balance at end of period ............................................................................................................
Less: Current portion..........................................................................................................
Noncurrent accrued product warranty and deferred warranty revenue ..................................... $

________________________

For the Years Ended October 31,

2018

2017

2016

629

211

1
(9)
(303)
529

255

274

818

199
(1)
(1)
(386)
629

307

322

994

186

77
(442)
818

396

422

(A) Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior periods. Such adjustments typically

In the second quarter of 2016, we recorded a charge for adjustments to pre-existing warranties of $46 million or a charge of $0.56 per diluted share. The
charge primarily relates to increases in both claim frequency and cost of repair across both the Medium Duty and Big Bore engine families. The charge
increased the reserve for our standard warranty obligations as well as the loss positions related to our Big Bore extended service contracts. Adjustments to
pre-existing warranties in 2016 include a benefit of $1 million related to our Workhorse Custom Chassis operations, which are reported in Discontinued
Operations in our Consolidated Statements of Operations.

The impact of income taxes on the 2018, 2017, and 2016 adjustments are not material due to our deferred tax valuation allowances on our U.S. deferred
tax assets.

Extended Warranty Programs

The amount of deferred revenue related to extended warranty programs was $255 million, $271 million, and $325 million at
October 31, 2018, 2017, and 2016, respectively. Revenue recognized under our extended warranty programs was $104 million,
$144 million, and $150 million for the years ended October 31, 2018, 2017, and 2016, respectively.

In 2018, we recognized a net benefit of $29 million related to extended warranty contracts on our proprietary Big-Bore engines,
which includes a benefit of $33 million related to pre-existing warranties. In 2017, we recognized a net charge of $8 million
related to extended warranty contracts on our proprietary Big-Bore engines, which includes a charge of $3 million related to
pre-existing warranties. In 2016, we recognized a net charge of $34 million related to extended warranty contracts on our
proprietary Big-Bore engines, which includes a charge of $26 million related to pre-existing warranties.

Stock-based Compensation

We have various plans that provide for the granting of stock-based compensation to certain employees, directors, and
consultants, which is further described in Note 17, Stock-Based Compensation Plans. Shares are issued upon option exercise
from Common stock held in treasury.

For transactions in which we obtain employee services in exchange for an award of equity instruments, we measure the cost of
the services based on the grant date fair value of the award. We recognize the cost over the period during which an employee is
required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). Costs
related to plans with graded vesting are generally recognized using a straight-line method.

Foreign Currency Translation

We translate the financial statements of foreign subsidiaries whose local currency is their functional currency to U.S. dollars
using period-end exchange rates for assets and liabilities and weighted average exchange rates for each period for revenues and
expenses. Differences arising from exchange rate changes are included in the Foreign currency translation adjustment
component of AOCL.

For foreign subsidiaries whose functional currency is the U.S. dollar, we remeasure non-monetary balance sheet accounts and
the related income statement accounts at historical exchange rates. Gains and losses arising from fluctuations in currency

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as
incurred. We recognized net foreign currency transaction losses of $2 million, $16 million, and less than $1 million in 2018,
2017, and 2016, respectively, which were recorded in Other income, net.

Income Taxes

We file a consolidated U.S. federal income tax return for NIC and its eligible domestic subsidiaries. Our non-U.S. subsidiaries
file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit
carryforwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation
allowance is established or maintained when, based on currently available information, it is more likely than not that all or a
portion of a deferred tax asset will not be realized.

Earnings Per Share

The calculation of basic earnings per share is based on the weighted average number of our shares of common stock
outstanding during the applicable period. The calculation for diluted earnings per share recognizes the effect of all potential
dilutive shares of common stock that were outstanding during the respective periods, unless their impact would be anti-dilutive.

Diluted earnings per share recognizes the dilution that would occur if securities or other contracts to issue common stock were
exercised or converted into shares using the treasury stock method.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and
assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts,
income tax contingency accruals and valuation allowances, product warranty accruals, used truck inventory valuations, asbestos
and other product liability accruals, asset impairment charges, restructuring charges and litigation-related accruals. Actual
results could differ from our estimates.

Concentration Risks

Our financial condition, results of operations, and cash flows are subject to concentration risks related to our significant
unionized workforce. As of October 31, 2018, approximately 8,200, or 99%, of our hourly workers and approximately 700, or
13%, of our salaried workers, are represented by labor unions and are covered by collective bargaining agreements. Our current
master collective bargaining agreement with the United Automobile, Aerospace and Agricultural Implement Workers of
America ("UAW") expired in October 2018 and we are in negotiations with the UAW to enter into a new collective bargaining
agreement. Our future operations may be affected by changes in governmental procurement policies, budget considerations,
changing national defense requirements, and political, regulatory and economic developments in the U.S. and certain foreign
countries (primarily Canada, Mexico, and Brazil).

Recently Issued Accounting Standards

In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-15, "Intangibles-Goodwill and
Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement".
This ASU provides guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement
(hosting arrangement) and determining when the arrangement includes a software license. This ASU is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. This
ASU is effective for us in the first quarter of fiscal 2021. We are currently evaluating the impact of this ASU on our
consolidated financial statements.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to
SEC Staff Accounting Bulletin No. 118". This ASU updates the income tax accounting in U.S. GAAP to reflect the SEC's
interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (H.R.1) (the "Tax Act") was signed into
law. For more information regarding the impact of the Tax Act, see Note 11, Income Taxes.

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)".
This ASU provides guidance on a reclassification from accumulated other comprehensive income to retained earnings for the
effect of the tax rate change resulting from the Tax Act. The amendments eliminate the stranded tax effects resulting from the
Tax Act and will improve the usefulness of information reported to financial statement users. This ASU is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. This
ASU is effective for us in the first quarter of fiscal 2020. We are currently evaluating the impact of this ASU on our
consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". This ASU requires that an employer
disaggregate the service cost component from the other components of net periodic benefit cost. In addition, only the service
cost component will be eligible for capitalization. The amendments in this update are required to be applied retrospectively for
the presentation of the service cost component and the other components of net periodic benefit cost in the Consolidated
Statement of Operations and prospectively, on and after the adoption date, for the capitalization of the service cost component
of net periodic benefit cost in assets. This ASU is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal
2019. The guidance, which requires retrospective application, will result in a reclassification of certain net periodic benefit costs
from SG&A expenses to Other Income, net in the amounts of $94 million and $127 million as of October 31, 2018 and 2017,
respectively.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a
Business". This ASU provides a new framework for determining whether transactions should be accounted for as acquisitions
or disposals of assets or businesses. This ASU creates an initial screening test that reduces the population of transactions that an
entity needs to analyze to determine whether there is an input and substantive processes in the acquisition or disposal. Fewer
transactions are expected to involve acquiring or selling a business. This ASU is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2017, with early adoption permitted. This ASU is effective for us in the
first quarter of fiscal 2019. Adoption will require a prospective transition. The potential impact of this new guidance will be
assessed for future acquisitions or dispositions, but we do not expect the impact of this ASU to have a material effect on our
consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows: Restricted Cash" (Topic 230). This ASU
requires that a statement of cash flows explain the change during the period in the total of cash, and cash equivalents, including
amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as
restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. This
ASU is effective for us in the first quarter of fiscal 2019. Adoption will require a retrospective transition.

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes: Intra-Entity Transfers of Assets Other Than
Inventory” (Topic 740). This ASU update requires entities to recognize the income tax consequences of many intercompany
asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax
consequences of an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred. The
ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early
adoption permitted. This ASU is effective for us in the first quarter of fiscal 2019. Adoption will require a modified
retrospective transition. We do not expect the impact of this ASU to have a material effect on our consolidated financial
statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and
Cash Payments” (Topic 230). This ASU provides guidance on how entities should classify eight specific cash flow transactions
for which diversity in practice exists. This ASU is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2017, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2019.
Adoption will require a retrospective transition. We do not expect the impact of this ASU to have a material effect on our
consolidated financial statements.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on
Financial Instruments” (Topic 326). This ASU sets forth an expected credit loss model which requires the measurement
of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and
supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on
financial assets measured at amortized cost, and certain off-balance sheet credit exposures. This ASU is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.
Adoption will require a modified retrospective transition. This ASU is effective for us in the first quarter of fiscal 2021. We are
currently evaluating the impact of this ASU on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). This ASU requires lessees to recognize, on the
balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The
accounting by lessors will remain largely unchanged. This ASU is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018, with early adoption permitted. This ASU is effective for us in the first quarter
of fiscal 2020. We expect to adopt this ASU in the first quarter of fiscal 2020 on a modified retrospective basis, with the
cumulative effect adjustment recognized into Accumulated deficit as of November 1, 2019. We will continue to evaluate the
impact of this ASU on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606) (“ASC 606”), which
supersedes the revenue recognition requirements in ASC 605, "Revenue Recognition." This ASU is based on the principle that
revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including
significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In
August 2015, the FASB issued ASU No. 2015-14, which postponed the effective date of ASU No. 2014-09 to fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted on the original
effective date for fiscal years beginning after December 15, 2016. We analyzed the impact of the ASU on our portfolio of
customer contracts which will result in a change in the timing and the amount of revenue recognized and gross versus net
accounting for certain revenue streams in comparison with current guidance.

On November 1, 2018, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the
related amendments (“new revenue standard”) using the modified retrospective method. Based on our preliminary assessment,
the cumulative effect adjustment upon adoption of the new revenue standard will have a net immaterial impact on our
Accumulated deficit. The primary impacts include an increase in Accumulated deficit due to an increase in the refund liability
owed to our customers for future returns of core components. Previously our refund liability was recorded net of our future
trade-in value to our suppliers. Under the new revenue standard, we will be recording a liability for the amounts owed to our
customers and a deposit asset for the amount we are currently eligible to receive from our suppliers. An additional increase
relates to a change in the recognition pattern of revenue for extended service contracts. Revenue from these contracts was
recognized on a straight-line basis over the life of the contract. Under the new revenue standard, revenue for extended service
contracts will be recorded in proportion to the costs expected to be incurred in satisfying the obligations based on historical cost
patterns over the life of similar contracts. The increase in Accumulated deficit is partially offset by certain contracts where
revenue recognition occurred as units were delivered and accepted. Under the new revenue standard, when the contract
transfers control of a good to a customer as services or production occurs, revenue will be recognized over time. An additional
decrease in Accumulated deficit relates to certain sales that were recorded as leases or borrowings as we retained substantial
risks of ownership. Under the new revenue standard, revenue will be recognized upon transfer of control for these transactions,
less the value of any guarantees provided to the customer. The adoption of the new revenue standard will result in changes in
the classification of Sales and revenues, net and Costs of products sold in our Consolidated Statements of Operations. The new
revenue standard will also result in changes in the classification of certain assets and liabilities in our Consolidated Balance
Sheets.

We will provide expanded revenue recognition disclosures based on the new qualitative and quantitative disclosure
requirements of the new revenue standard in our Quarterly Report on Form 10-Q for the first quarter of 2019.

2. Restructurings and Impairments

Restructuring charges are recorded based on restructuring plans that have been committed to by management and are, in part,
based upon management's best estimates of future events. Changes to the estimates may require future adjustments to the
restructuring liabilities.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Restructuring Liability

The following tables summarize the activity in the restructuring liability, which excludes pension and other postretirement
contractual termination benefits:

(in millions)
Employee termination charges ....... $
Lease vacancy ................................
Other...............................................

Restructuring liability ............. $

(in millions)
Employee termination charges ....... $
Lease vacancy ................................
Other...............................................

Restructuring liability ............. $

Balance at
October 31, 2017
14

Additions

Payments

Adjustments

Balance at
October 31, 2018
3

Balance at
October 31, 2016
5

Payments

Adjustments

Balance at
October 31, 2017
14

—

1
7

Additions

—

—
22

—

(10) $
—

—
(10) $

(12) $
(1)
—
(13) $

(4) $
—

—
(4) $

(1) $
—

—
(1) $

—

1
15

Payments

Adjustments

(63) $
(4)
—
(67) $

—

Balance at
October 31, 2016
5
$

(in millions)
Employee termination charges ....... $
Lease vacancy ................................
Other...............................................

Balance at
October 31, 2015
62

Restructuring liability ............. $

Cost-Reductions and Other Strategic Initiatives

From time to time, we have announced, and we may continue to announce, actions to control spending across the Company
with targeted reductions of certain costs. We are focused on continued reductions in discretionary spending, including
reductions resulting from efficiencies, and prioritizing or eliminating certain programs or projects.

Voluntary separation program and reduction-in-force actions

During 2015, we initiated new cost-reduction actions, including a reduction-in-force in the U.S. and Brazil. As a result of these
actions, we recognized restructuring charges of $13 million in personnel costs for employee termination and related benefits,
which were primarily paid throughout 2016.

We also offered the majority of our U.S.-based non-represented salaried employees the opportunity to apply for a voluntary
separation program ("VSP"). As a result of these actions, we recognized restructuring charges of $37 million. The restructuring
charges primarily consist of personnel costs for employee termination and related benefits. In addition, we initiated new cost-
reduction actions, including a reduction-in-force in Brazil. As a result of these actions, we recognized restructuring charges of
$10 million in personnel costs for employee termination and related benefits, which were paid throughout 2016.

Global operations employee separation actions

During 2017, we initiated cost-reduction actions impacting our workforce in Brazil. As a result of these actions, we recognized
restructuring charges of $6 million in personnel costs for employee separation and related benefits. During 2018, we recognized
a benefit of $1 million upon the completion of these separation actions. This benefit was recorded in our Global operations
segment within Restructuring charges in our Consolidated Statements of Operations.

North American Manufacturing Restructuring Activities

We continue to focus on our core Truck and Parts businesses and evaluate our portfolio of assets to validate their strategic and
financial fit. This allows us to close or divest non-strategic businesses, and identify opportunities to restructure our business and
rationalize our Manufacturing operations in an effort to optimize our cost structure. For those areas that fall outside our strategic
businesses, we are evaluating alternatives which could result in additional restructuring and other related charges in the future,

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

including but not limited to: (i) impairments, (ii) costs for employee and contractor termination and other related benefits, and
(iii) charges for pension and other postretirement contractual benefits and curtailments. These charges could be significant.

Chatham restructuring activities

During 2011, we committed to close our Chatham, Ontario heavy truck plant, which had been idled since June 2009. At that
time, we recognized curtailment and contractual termination charges related to postretirement plans. Based on a ruling
regarding pension benefits received from the Financial Services Tribunal in Ontario, Canada, in the third quarter of 2014, we
recognized additional charges of $14 million related to the 2011 closure of the Chatham, Ontario plant. Unsuccessful efforts to
appeal the ruling in the Ontario court system ended in December 2015. In April 2016, we filed a qualified partial wind-up report
for approval by the Financial Services Commission of Ontario ("FSCO"). In January 2017, FSCO issued its approval of the
partial wind-up report. In February 2017, we finalized the resolution of statutory severance pay for former employees related to
the closure of our Chatham, Ontario plant, resulting in a charge of $6 million in the first quarter of 2017. During the third
quarter of 2017, we finalized the Chatham closure agreement. This resulted in the release of $66 million in other post-
employment benefit ("OPEB") liabilities. In addition, a pension settlement accounting charge of $23 million was recorded as a
result of lump-sum payments made to certain pension plan participants. These charges and benefits were recorded in our Truck
segment within Restructuring charges in our Consolidated Statements of Operations.

Melrose Park Facility restructuring activities

In the third quarter of 2017, we committed to a plan to cease engine production at our plant in Melrose Park, Illinois (“Melrose
Park Facility”) in the third quarter of fiscal year 2018. As a result, in the third quarter of 2017, we recognized charges of $41
million in our Truck segment. The charges include $23 million related to pension and OPEB liabilities and $8 million for
severance pay recorded in Restructuring charges in our Consolidated Statements of Operations. We also recorded $10 million
of inventory reserves and other related charges Costs of products sold in our Consolidated Statements of Operations. During
2018, we recognized a benefit of $2 million related to the finalized cessation of production agreement. This benefit was
recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. Production at the
Melrose Park Facility ceased in May 2018.

See Note 10, Postretirement benefits for further discussion.

Asset Impairments

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

(in millions)
Intangible asset impairment charge .................................................................................... $
Other asset impairment charges related to continuing operations ......................................

Total asset impairment charges.................................................................................... $

For the Years Ended October 31,

2018

2017

2016

— $
14

— $

As a result of the economic downturn in Brazil in 2016 causing declines in actual and forecasted results, we tested the
indefinite-lived intangible asset of our Brazilian engine reporting unit for potential impairment. As a result, we determined that
the trademark asset carrying value was impaired, resulting in charges of $1 million for the year ended October 31, 2016. For
more information, see Note 1, Summary of Significant Accounting Policies.

During 2018, we concluded that we had triggering events related to the sale of our railcar business in Cherokee, Alabama
requiring the impairment of certain long-lived assets. As a result, we recorded a charge of $2 million in our Truck segment. In
February 2018, we completed the sale of the business. We also concluded that we had triggering events related to other certain
long-lived assets, and recorded additional charges of $6 million in our Truck segment and a charge of $1 million in our
Financial Services segment.

During 2017, we concluded that we had a triggering event in connection with the sale of our fabrication business in Conway,
Arkansas requiring the impairment of certain assets. As a result, we recorded charges of $5 million in our Truck segment.

During 2018 and 2017, we concluded that we had triggering events related to certain assets under operating leases. As a result,
we recorded charges of $5 million and $8 million, respectively, in our Truck segment.

During 2016, we concluded that we had triggering events related to certain long-lived assets in our Truck segment. As a result,
certain long-lived assets were determined to be impaired, resulting in charges of $17 million. Included in the charges was a $3
million asset impairment related to the sale of Pure Power Technologies, LLC, a components business focused on air and fuel

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

systems. During 2016, we also concluded that we had triggering events related to certain operating leases. As a result, we
recorded $8 million of asset impairment charges in our Truck segment.

These charges were recorded in Asset impairment charges in our Consolidated Statements of Operations.

See Note 12, Fair Value Measurements, for information on the valuation of impaired operating leases and other assets.

3. Finance Receivables

Finance receivables are receivables of our Financial Services operations. Finance receivables generally consist of wholesale
notes and accounts, as well as retail notes, finance leases and accounts. Total finance receivables reported on the Consolidated
Balance Sheets are net of an allowance for doubtful accounts. Total assets of our Financial Services operations net of
intercompany balances are $2.6 billion and $2.2 billion as of October 31, 2018 and 2017, respectively. Included in total assets
of our Financial Services operations are finance receivables of $2.2 billion and $1.8 billion as of October 31, 2018 and 2017,
respectively. We have two portfolio segments of finance receivables that we distinguish based on the type of customer and
nature of the financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the
purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.

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

(in millions)
Retail portfolio ........................................................................................................................................ $
Wholesale portfolio.................................................................................................................................
Total finance receivables..................................................................................................................
Less: Allowance for doubtful accounts ...................................................................................................
Total finance receivables, net...........................................................................................................
Less: Current portion, net(A) ....................................................................................................................

720

1,460

2,180

2,158
1,898

Noncurrent portion, net.................................................................................................................... $

260

559

1,246

1,805

1,785
1,565

220

As of October 31,

2018

2017

_________________________
(A) The current portion of finance receivables is computed based on contractual maturities. Actual cash collections typically vary from the contractual cash

flows because of prepayments, extensions, delinquencies, credit losses, and renewals.

As of October 31, 2018, contractual maturities of our finance receivables are as follows:

(in millions)
Due in:

Retail
Portfolio

Wholesale
Portfolio

Total

2019.......................................................................................................................... $
2020..........................................................................................................................
2021..........................................................................................................................
2022..........................................................................................................................
2023..........................................................................................................................
Thereafter.................................................................................................................
Gross finance receivables ..................................................................................................
Less: Unearned finance income.........................................................................................

Total finance receivables.......................................................................................... $

471
133
94
57
18
4
777
57
720

1,460
—
—
—
—
—
1,460
—
1,460

1,931
133
94
57
18
4
2,237
57
2,180

Securitizations

Our Financial Services operations transfer wholesale notes, retail accounts receivable, finance leases, and operating leases to
special purpose entities ("SPEs"), which generally are only permitted to purchase these assets, issue asset-backed securities, and
make payments on the securities issued. In addition to servicing receivables, our continued involvement in the SPEs may
include an economic interest in the transferred receivables and, in some cases, managing exposure to interest rate changes on
the securities using interest rate swaps or interest rate caps. There were no transfers of finance receivables that qualified for sale
accounting treatment as of October 31, 2018 and 2017, and as a result, the transferred finance receivables are included in our

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Consolidated Balance Sheets and the related interest earned is included in Finance revenues.

We transfer eligible finance receivables into trusts in order to issue asset-backed securities. These trusts are VIEs of which we
are determined to be the primary beneficiary and, therefore, the assets and liabilities of the trusts are included in our
Consolidated Balance Sheets. The outstanding balance of finance receivables transferred into these VIEs was $956 million and
$797 million as of October 31, 2018 and 2017, respectively.

Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $235 million
and $163 million as of October 31, 2018 and 2017, respectively. For more information on assets and liabilities of consolidated
VIEs and other securitizations accounted for as secured borrowings by our Financial Services segment, see Note 1, Summary of
Significant Accounting Policies.

Finance Revenues

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

(in millions)
Retail notes and finance leases revenue ............................................................................................. $
Wholesale notes interest.....................................................................................................................
Operating lease revenue .....................................................................................................................
Retail and wholesale accounts interest...............................................................................................
Gross finance revenues ...............................................................................................................
Less: Intercompany revenues .............................................................................................................

97
Finance revenues......................................................................................................................... $ 160

50
105

257

41
102

235

$ 142

38
107

235

100

135

As of October 31,

2018

2017

2016

4. Allowance for Doubtful Accounts

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

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

For the Year Ended October 31, 2018

(in millions)
Allowance for doubtful accounts, at beginning of period.................................. $
Provision for doubtful accounts .........................................................................
Charge-off of accounts .......................................................................................
Recoveries ..........................................................................................................
Other(A) ...............................................................................................................

Allowance for doubtful accounts, at end of period ..................................... $

Retail
Portfolio
17
7
(7)
3
(1)
19

Total

Wholesale
Portfolio
3
$
—

—
—

—
3

Trade and
Other
Receivables
28
$
3
(1)
—
(2)
28

For the Year Ended October 31, 2017

Allowance for doubtful accounts, at end of period ..................................... $

Retail
Portfolio
19

Wholesale
Portfolio
2
$

Trade and
Other
Receivables
28
$

4
(7)
1

—

1
—

—

2
(1)
—
(1)
28

Total

48
10
(8)
3
(3)
50

7
(8)
1
(1)
48

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Year Ended October 31, 2016

Allowance for doubtful accounts, at end of period ..................................... $

____________________
(A) Amounts include impact from currency translation.

Retail
Portfolio
22

Wholesale
Portfolio
4
$
(2)
—

—

8
(9)
—
(2)
19

Trade and
Other
Receivables
22
$

Total

12
(12)
—

6
(3)
—

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

The following table presents information regarding impaired finance receivables:

October 31, 2018

October 31, 2017

(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...............................

Retail
Portfolio
20

Wholesale
Portfolio
$

— $

—

Total

—

Retail
Portfolio
16
$

Wholesale
Portfolio
$

— $

—

Total

—

The average balances of the impaired finance receivables in the retail portfolio were $19 million and $18 million for the years
ended October 31, 2018 and 2017, respectively. See Note 12, Fair Value Measurements, for information on the valuation of
impaired finance receivables.

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

As of October 31, 2018

(in millions)
Current, and less than 30 days past due....................................................................................................... $
30-90 days past due.....................................................................................................................
Over 90 days past due .................................................................................................................

Total finance receivables...................................................................................................... $

Retail
Portfolio
655
51
14
720

5. Inventories

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

(in millions)
Finished products .................................................................................................................................... $
Work in process.......................................................................................................................................
Raw materials..........................................................................................................................................

Wholesale
Portfolio
$ 1,459
1
—
$ 1,460

Total
$ 2,114
52
14
$ 2,180

As of October 31,

2018

2017

671
118

321

584

240

857

Total inventories, net........................................................................................................................ $

1,110

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

6. Property and Equipment, Net

The following table presents the components of Property and equipment, net in our Consolidated Balance Sheets:

(in millions)
Land ........................................................................................................................................................ $
Buildings.................................................................................................................................................
Leasehold improvements ........................................................................................................................
Machinery and equipment ......................................................................................................................
Furniture, fixtures, and equipment..........................................................................................................
Equipment leased to others.....................................................................................................................
Construction in progress .........................................................................................................................
Total property and equipment, at cost...........................................................................................
Less: Accumulated depreciation and amortization .................................................................................

Property and equipment, net ......................................................................................................... $

As of October 31,

2018

2017

554

2,028

461

665

3,868

2,498
1,370

548

2,057

426

586

3,800

2,474
1,326

Certain of our property and equipment serve as collateral for borrowings. See Note 9, Debt, for description of borrowings.

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 ...................................... $

As of October 31,

2018

2017

665

177

488

586

191

395

For the years ended October 31, 2018, 2017, and 2016, depreciation expense, amortization expense related to assets under
financing arrangements and capital lease obligations, and interest capitalized on construction projects are as follows:

(in millions)
Depreciation expense ........................................................................................................ $
Depreciation of equipment leased to others ......................................................................
Amortization expense .......................................................................................................
Interest capitalized ............................................................................................................

For the Years Ended October 31,

2018

2017

2016

133
71
2
2

138
73
3
2

134
79
5
3

Certain depreciation expense on buildings used for administrative purposes is recorded in SG&A expenses.

Capital Expenditures

At October 31, 2018, 2017, and 2016, commitments for capital expenditures were $36 million, $27 million, and $24 million,
respectively. At October 31, 2018, 2017, and 2016, liabilities related to capital expenditures that are included in accounts
payable were $50 million, $48 million, and $21 million, respectively.

Leases

We lease certain land, buildings, and equipment under non-cancelable operating leases and capital leases expiring at various
dates through 2027. Operating leases generally have 1 to 20 year terms, with one or more renewal options, with terms to be

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

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, 2018, 2017, and 2016
was $40 million, $49 million, and $53 million, respectively. Rental income from subleases for the years ended October 31,
2018, 2017, and 2016 was $5 million, $11 million, and $12 million, respectively.

Future minimum lease payments at October 31, 2018, for those leases having an initial or remaining non-cancelable lease term
in excess of one year and certain leases that are treated as finance lease obligations, are as follows:

(in millions)
2019........................................................................................................... $
2020...........................................................................................................
2021...........................................................................................................
2022...........................................................................................................
2023...........................................................................................................
Thereafter ..................................................................................................

Less: Interest portion.................................................................................

Total ................................................................................................... $

Asset Retirement Obligations

Financing
Arrangements
and Capital
Lease Obligations
5

Operating
Leases

14
18

Total

15
18

133

148

1
—

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.

7. Goodwill and Other Intangible Assets, Net

For our reporting unit with goodwill, we perform a goodwill impairment test on an annual basis on August 1st, or more
frequently, if circumstances change or an event occurs that would more likely than not reduce the fair value of the reporting unit
below its carrying amount. All of our goodwill is included in our Parts segment. As part of our impairment analysis for this
reporting unit in the current year, we performed a qualitative assessment.

Our intangible assets that are not subject to amortization includes a trademark in our Brazilian engine reporting unit of $18
million and $21 million as of October 31, 2018 and 2017, respectively. During the third quarter of 2016, we determined that $1
million of the trademark asset carrying value was impaired. For more information, see Note 2, Restructuring and Impairments.

Information regarding our intangible assets that are subject to amortization is as follows:

(in millions)
Gross carrying value ..................................................................................... $
Accumulated amortization ............................................................................

Net of amortization ................................................................................ $

As of October 31, 2018

Customer
Base and
Relationships

Trademarks,
Patents and
Other

68
(66)
2

84
(74)
10

Total

152
(140)
12

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(in millions)
Gross carrying value(A).................................................................................. $
Accumulated amortization(A).........................................................................

Net of amortization ................................................................................ $

As of October 31, 2017

Customer
Base and
Relationships

Trademarks,
Patents and
Other

71
(67)
4

83
(68)
15

Total

154
(135)
19

__________________________
(A) During 2018, we identified certain intangible assets subject to amortization which were fully amortized and no longer in use as of October 31, 2017. As a
result, we have reduced both the Gross carrying value and Accumulated amortization by $2 million for Customer Base and Relationships and $34 million for
Trademarks, Patents and Other. These reclassifications did not impact our Consolidated Statements of Operations or Consolidated Balance Sheets.

We recorded amortization expense for our finite-lived intangible assets of $7 million, $12 million, and $12 million for the years
ended October 31, 2018, 2017, and 2016, respectively. Future estimated amortization expense for our finite-lived intangible
assets for the remaining years is as follows:

(in millions)
2019.......................................................................................................................................................................... $
2020..........................................................................................................................................................................
2021..........................................................................................................................................................................
2022..........................................................................................................................................................................
2023..........................................................................................................................................................................
Thereafter .................................................................................................................................................................

Estimated
Amortization
3

8. Investments in Non-consolidated Affiliates

Investments in non-consolidated affiliates is comprised of our interests in partially-owned affiliates of which our ownership
percentages range from 30% to 50%. We do not control these affiliates, but have the ability to exercise significant influence
over their operating and financial policies. We account for them using the equity method of accounting. We made no new and
incremental investments in these non-consolidated affiliates for 2018 and 2017.

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 ........................................................................................................ $

(Unaudited)

2018

2017

336
168
504

307
38
345

106

159

504

286
179
465

257
38
295

114

170

465

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

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 .........................................................................

505

507

Net income (loss) ....................................................................................................... $

(2) $

497

488

584

571

(Unaudited)

2018

2017

2016

We recorded sales to certain of these affiliates totaling $4 million, $5 million, and $6 million in 2018, 2017, and 2016,
respectively. We also purchased $166 million, $156 million, and $207 million of products and services from certain of these
affiliates in 2018, 2017, and 2016, respectively.

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 ........................................................................................................................

2018

2017

As of October 31, 2018 and 2017, our share of net unfunded earnings in non-consolidated affiliates totaled $1 million and $7
million, respectively.

9. Debt

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

(in millions)
Manufacturing operations

Senior Secured Term Loan Credit Agreement, due 2025, net of unamortized discount of $7 and
unamortized debt issuance costs of $11........................................................................................... $
Senior Secured Term Loan Credit Facility, as amended, due 2020, net of unamortized discount
of $7, and unamortized debt issuance costs of $9............................................................................

6.625% Senior Notes, due 2026, net of unamortized debt issuance costs of $17............................
8.25% Senior Notes, due 2022, net of unamortized discount of $13 and unamortized debt
issuance costs of $14........................................................................................................................
4.50% Senior Subordinated Convertible Notes, due 2018, net of unamortized discount of $5 and
unamortized debt issuance costs of $1.............................................................................................
4.75% Senior Subordinated Convertible Notes, due 2019, net of unamortized discount of $5 and
$14, respectively, and unamortized debt issuance costs of $1 and $3, respectively........................
Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040, net of unamortized debt
issuance costs of $5 at both dates ....................................................................................................
Financed lease obligations ...............................................................................................................
Other ................................................................................................................................................
Total Manufacturing operations debt........................................................................................
Less: Current portion .......................................................................................................................

As of October 31,

2018

2017

1,570

—

1,083

—

405

220
122
26
3,426
461

1,003

—

1,423

194

394

220
130
43
3,407

286

Net long-term Manufacturing operations debt ......................................................................... $

2,965

3,121

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(in millions)
Financial Services operations

Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through
2023, net of unamortized debt issuance costs of $4 and $5, respectively ....................................... $
Senior secured NFC Term Loan, due 2025, net of unamortized discount of $2, and unamortized
debt issuance costs of $4 .................................................................................................................
Bank credit facilities, at fixed and variable rates, due dates from 2019 through 2024, net of
unamortized debt issuance costs of $2 and $2, respectively ...........................................................
Commercial paper, at variable rates, program matures in 2022 ......................................................
Borrowings secured by operating and finance leases, at various rates, due serially through 2024.
Total Financial Services operations debt..................................................................................
Less: Current portion.......................................................................................................................

As of October 31,

2018

2017

948

849

394

519

105

2,041

485

—

616

1,651

883

768

Net long-term Financial Services operations debt ................................................................... $

1,556

Manufacturing Operations

Senior Secured Term Loan Credit Agreement

On November 6, 2017, we signed a definitive credit agreement relating to a seven-year senior secured term loan credit facility
in an aggregate principal amount of $1.6 billion (“Term Loan Credit Agreement”), guaranteed by Navistar International
Corporation and twelve of its subsidiaries. Under the terms of the Term Loan Credit Agreement, the interest rate on the
outstanding loan is based, at our option, on an adjusted Eurodollar Rate, plus a margin of 3.50%, or a Base Rate, plus a margin
of 2.50%. The Term Loan Credit Agreement requires quarterly amortization payments of $4 million with the balance due at
maturity on November 6, 2024. A portion of the proceeds from the Term Loan Credit Agreement was used to repay all
outstanding loans under our previously existing Senior Secured Term Loan Credit Facility ("Term Loan"), to redeem a portion
of the previously outstanding 8.25% Senior Notes and to pay accrued and unpaid interest thereon, and pay certain transaction
fees and expenses incurred in connection with the new Term Loan Credit Agreement.

The remainder of the proceeds of the Term Loan Credit Agreement will be used for ongoing working capital purposes and
general corporate purposes.

Senior Secured Term Loan Credit Facility

In February 2017, the Term Loan was amended, pursuant to which the Company's remaining approximately $1.0 billion loan
was repriced and provisions regarding European Union bail-in legislation were inserted. The amendment reduced the interest
rate applicable to the outstanding loan by 1.50%. Under the terms of the amendment, the interest rate on the outstanding loan
was based, at our option, on an adjusted Eurodollar Rate, plus a margin of 4.00%, or a Base Rate, plus a margin of 3.00%. In
connection with the amendment, we paid a consent fee equal to 0.25% of the aggregate principal amount, a call protection fee
equal to 1.00% of the aggregate principal amount, and certain other fees. During the second quarter of 2017, we recorded a
charge of $4 million related to certain third party fees and debt issuance costs associated with the repricing of our Term Loan.
The remaining debt issuance costs were recorded as a direct deduction from the carrying amount of the Term Loan and
amortized through Interest expense over the remaining life of the Term Loan.

Upon the full repayment in the first quarter of 2018, we recorded approximately $16 million of charges related to the
extinguishment of unamortized debt issuance costs associated with the Term Loan, included in Other income, net on our
Consolidated Statements of Operations.

6.625% Senior Notes

On November 6, 2017, we issued $1.1 billion in aggregate principal amount of 6.625% senior notes, due 2026 ("6.625% Senior
Notes"). Interest is payable on the 6.625% Senior Notes on May 1 and November 1 of each year beginning on May 1, 2018
until the maturity date of November 1, 2025. The proceeds from the 6.625% Senior Notes offering were used to redeem a
portion of our previously existing 8.25% Senior Notes, to pay accrued and unpaid interest thereon, and pay the associated
prepayment premiums, certain transaction fees and expenses incurred in connection with the new 6.625% Senior Notes.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

8.25% Senior Notes

In January 2017, we issued an additional $250 million principal amount of 8.25% Senior Notes, bringing the aggregate
principal amount to $1.45 billion at that time. Debt issuance costs of $4 million were recorded as a direct deduction from the
carrying amount and were amortized through Interest expense over the remaining life. As a result of the transaction, the
effective interest rate of the 8.25% Senior Notes became 8.51%. The proceeds were used for general corporate purposes,
including working capital and capital expenditures.

In November 2017, the 8.25% Senior Notes, in the full aggregate principal amount of $1.45 billion, were redeemed using
proceeds from the 6.625% Senior Notes and the Senior Secured Term Loan Credit Agreement. In the first quarter of 2018, we
recorded approximately $30 million of charges related to the extinguishment of unamortized debt issuance costs and tender
premiums associated with the 8.25% Senior Notes, included in Other income, net on our Consolidated Statements of
Operations.

4.50% Senior Subordinated Convertible Notes

In October 2013, we completed the private sale of $200 million of 4.50% senior subordinated convertible notes due October
2018 ("2018 Convertible Notes"). We received proceeds of $196 million, net of $3 million of issuance costs and a $1 million
issuance discount. The 2018 Convertible Notes were senior subordinated unsecured obligations of the Company. The 2018
Convertible Notes were fully repaid upon maturity in October 2018, and none were converted into our common stock.

4.75% Senior Subordinated Convertible Notes

During the second quarter of 2014, we completed the private sale of $411 million of the 2019 Convertible Notes, including a
portion of the underwriter's over-allotment option. We received proceeds of $402 million, net of $9 million of issuance costs.
Interest is payable on April 15 and October 15 of each year until the maturity date. The 2019 Convertible Notes are senior
subordinated unsecured obligations of the Company.

In accounting for the issuance, the 2019 Convertible Notes were separated into a debt component and an equity component,
resulting in the debt component being recorded at estimated fair value without consideration given to the conversion feature.
The excess of the principal amount of the liability component over the carrying amount is treated as debt discount and will be
amortized to Interest expense using the effective interest method over the term of the 2019 Convertible Notes. We estimated the
fair value of the liability component at $367 million. The equity component of $44 million is recorded in Additional paid-in
capital and will not be remeasured as long as it continues to meet the conditions for equity classification. Issuance costs are also
allocated between the debt and equity components resulting in $8 million of debt issuance costs recorded as an offset of the
2019 Convertible Notes in Long-term debt and $1 million recorded as a reduction in Additional paid-in capital. The liability
component of the debt issuance costs will be amortized to Interest expense over the term of the 2019 Convertible Notes.

We have the option to redeem the 2019 Convertible Notes for cash, in whole or in part, on any business day on or after April 20,
2017 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least
20 trading days (whether or not consecutive), during any 30 consecutive trading day period ending within 10 trading days
immediately prior to the date of the redemption notice ("Optional Redemption"). The redemption price is equal to 100% of the
principal amount of the 2019 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the
redemption date.

Holders may convert the 2019 Convertible Notes into our common stock at any time after October 15, 2018. Prior to October
15, 2018, holders could only convert upon the occurrence of specified trigger events, as more fully described in the 2019
Convertible Notes indenture. The conversion rate is 18.4946 shares of common stock per $1,000 principal amount of 2019
Convertible Notes (equivalent to a conversion price of approximately $54.07 per share of common stock). The conversion rate
may be adjusted for anti-dilution provisions and the conversion price may be decreased by the Board of Directors to the extent
permitted by law and listing requirements. The 2019 Convertible Notes can be settled, at our election, in common stock, cash,
or a combination of common stock and cash.

Loan Agreement related to the Tax Exempt Bonds

In October 2010, we benefited from the issuance of certain tax-exempt bond financings, of which: (i) the Illinois Finance
Authority issued and sold $135 million aggregate principal amount of Recovery Zone Facility Revenue Bonds due October 15,
2040, and (ii) The County of Cook, Illinois issued and sold $90 million aggregate principal amount of Recovery Zone Facility
Revenue Bonds also due October 15, 2040 (collectively the "Tax Exempt Bonds"). The Tax Exempt Bonds were issued
pursuant to separate, but substantially identical, indentures of trust dated as of October 1, 2010. The proceeds of the Tax
Exempt Bonds were loaned by each issuer to the Company pursuant to separate, but substantially identical, loan agreements
dated as of October 1, 2010. The proceeds from the issuance of the Tax Exempt Bonds were restricted for capital expenditures
87

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

related to financing the relocation of our headquarters, the expansion of an existing warehouse facility, and the development of
certain industrial and testing facilities, together with related improvements and equipment. The payment of principal and
interest on the Tax Exempt Bonds is guaranteed under separate, but substantially identical, bond guarantees issued by NI. The
Tax Exempt Bonds are special, limited obligations of each issuer, payable out of the revenues and income derived under the
related loan agreements and related guarantees. The Tax Exempt Bonds bear interest at the fixed rate of 6.50% per annum,
payable each April 15 and October 15, commencing April 15, 2011. Beginning on October 15, 2020, the Tax Exempt Bonds are
subject to optional redemption at the direction of the Company, in whole or in part, at the redemption price equal to 100% of the
principal amount thereof, plus accrued interest, if any, to the redemption date. In November 2010, we finalized the purchase of
the property and buildings that we developed into our new world headquarters site. As of October 31, 2018, none of the $225
million remains to be reimbursed under the Tax Exempt Bonds.

On November 6, 2017, the Company entered into the First Amendment to Loan Agreement with The County of Cook, Illinois
and the First Amendment to Loan Agreement with the Illinois Finance Authority (“Tax Exempt Bond Amendments”) to adjust
various covenants included in the loan agreements relating to the Tax Exempt Bonds, including to permit the Company to incur
secured debt up to $1.7 billion, in exchange for a coupon increase from 6.50% to 6.75% and the grant of a junior priority lien
on certain collateral securing the Company’s Term Loan Credit Agreement.

Financed Lease Obligations

We have accounted for as borrowings certain third-party equipment financings by BMO, our preferred source of retail customer
financing for equipment offered by us and our dealers in the U.S. The initial transactions do not qualify for revenue recognition
as we retain substantial risks of ownership in the leased property. As a result, the proceeds from the transfer are recorded as an
obligation and amortized to revenue over the term of the financing. The remaining obligation will be amortized through 2023
with interest rates ranging from 3.98% to 12.52%.

Amended and Restated Asset-Based Credit Facility

In August 2017, we amended and extended our asset-based credit facility ("Amended and Restated Asset-Based Credit
Facility") which was previously due in May 2018. The 2017 amendment extended the maturity date to August 2022 and
reduced the revolving facility from $175 million to $125 million. The borrowing base of the facility is secured by a first priority
security interest in certain of NI's aftermarket parts inventory locations and contains customary covenants, representations and
warranties. Our borrowing capacity under the amended facility is subject to a $13 million liquidity block and is impacted by
outstanding standby letters of credit issued under this facility and the amount of eligible inventory. Borrowings under the
Amended and Restated Asset-Based Credit Facility accrue interest at a rate equal to a base rate or an adjusted LIBOR rate plus
a spread. The spread is 175 basis points for Base Rate borrowings and 275 basis points for LIBOR borrowings. As of October
31, 2018, we had no borrowings but did have availability to borrow under the Amended and Restated Asset-Based Credit
Facility.

Financial Services Operations

Asset-backed Debt

In November 2016, the maturity date of the variable funding notes ("VFN") facility was extended from May 2017 to November
2017, and the maximum capacity was reduced from $500 million to $450 million. In May 2017, the VFN facility was extended
to May 2018, and the maximum capacity was reduced to $425 million. In December 2017, the maturity date of our VFN facility
was extended from May 2018 to December 2018, and the maximum capacity was reduced from $425 million to $350 million.
In November 2018, the maturity of the VFN facility was extended from December 2018 to May 2020. The VFN facility is
secured by assets of the wholesale note owner trust.

In October 2016, Navistar Financial Securities Corporation ("NFSC") issued $300 million of two-year investor notes secured
by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $250 million of investor notes that
matured in October 2016.

In June 2017, NFSC issued $250 million of two-year investor notes secured by assets of the wholesale note owner trust.
Proceeds were used, in part, to replace the $250 million of investor notes that matured in June 2017.

In September 2018, NFSC issued $300 million of two-year investor notes secured by assets of the wholesale note owner trust.
Proceeds were used, in part, to replace the $300 million of investor notes that matured in September 2018.

Our Mexican financial services affiliate, Navistar Financial, S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad
Regulada ("NFM"), issues secured notes, denominated in Mexican pesos, which are secured by retail finance receivables. The

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

aggregate balance of these notes was $31 million and $67 million, net of issuance costs, at October 31, 2018, and 2017,
respectively. These notes mature at various dates through March 2023.

In December 2016, Truck Retail Accounts Corporation ("TRAC"), a special purpose, wholly-owned subsidiary of NFC,
renewed the one-year revolving facility to October 2017. In May 2017, this facility was renewed to April 2018. In January
2018, the maturity date of our $100 million TRAC funding facility was extended from April 2018 to January 2019, and in
December 2018, the maturity was further extended to January 2020. Borrowings under this facility are secured by eligible retail
accounts receivable.

The majority of the above asset-backed debt is issued by consolidated SPEs and is payable out of collections on the finance
receivables sold to the SPEs. This debt is the legal obligation of the SPEs and not NFC or NFM. Assets used as collateral
include finance receivables, restricted cash and other assets. The carrying amount of the assets used as collateral for asset-
backed debt were $1.4 billion and $1.1 billion at October 31, 2018 and 2017, respectively. See Note 3, Finance Receivables, for
more information on finance receivables used to secure asset-backed debt.

Term Loan

In July 2018, NFC entered into a $400 million seven-year senior secured term loan facility ("NFC Term Loan"). The NFC Term
Loan is secured by a first-priority security interest in certain assets of NFC and ranks equal to that of NFC's bank credit facility.
The initial funding interest rate is LIBOR plus a margin of 3.75%. NFC has the option to use a defined alternate base rate. Debt
issuance costs and the original issuance discount of $4 million and $2 million, respectively, were recorded as a direct deduction
from the carrying amount and will amortize through Interest expense over the life of the loan. The NFC Term Loan requires
quarterly principal amortization payments of $1 million, with the balance due at maturity.

Bank Credit Facilities

In May 2016, NFC amended and extended its bank credit facility which was originally due in December 2016. The 2016
amendment extended the maturity date to June 2018 and initially reduced the revolving portion of the facility from $500 million
to $400 million. In December 2016, and in accordance with the amendment, the revolving portion of the facility was reduced to
a maximum of $275 million, the term loan portion of the facility was paid down to $82 million, and the quarterly principal
payments were reduced from $9 million to $2 million. The amendment allows NFC to increase revolving or term loan
commitments, subject to obtaining commitments from existing or new lenders to provide additional or increased revolving
commitments and/or additional term loans, to permit a maximum total facility size of $700 million after giving effect to any
such increase and without taking into account the non-extended loans and commitments.

In September 2017, the revolving portion of the bank credit facility was amended and extended to a maturity date of September
2021. The capacity of the facility was reduced from $275 million to $269 million in June 2018. The borrowings on the
revolving portion of the facility totaled $21 million and $127 million as of October 31, 2018 and 2017, respectively.

On June 1, 2018, in accordance with the terms of the May 2016 amended and extended bank credit facility of NFC, the term
loan portion was paid in full and the revolving portion capacity was reduced from $275 million to $269 million. The balance of
the term loan portion of the facility as of October 31, 2017, was $75 million. On June 12, 2018, certain leverage covenants and
baskets under the NFC bank credit facility were amended to allow for completion of the NFC Term Loan in July 2018.

We borrow funds under various bank credit lines denominated in U.S. dollars and Mexican pesos to be used for investment in
our Mexican financial services operations. As of October 31, 2018, borrowings outstanding under these arrangements were
$498 million, of which 28% was denominated in U.S. dollars and 72% in Mexican pesos. As of October 31, 2017, borrowings
outstanding under these arrangements were $414 million, of which 35% was denominated in U.S. dollars and 65% in Mexican
pesos. The interest rates on the dollar-denominated debt are at a negotiated fixed rate or at a variable rate based on LIBOR, and
the interest rates on peso-denominated debt are based on the Interbank Interest Equilibrium Rate.

Covenants of the NFC bank credit facility restrict certain payments such as dividends. In the years ended October 31, 2018 and
2017, NFC paid no dividends. In the year ended October 31, 2016, NFC paid cash dividends and returned capital to NI in the
aggregate amount of $220 million.

Commercial Paper

Effective February 2017, our Mexican financial services operation entered into a five-year commercial paper program for up to
P1.8 billion (the equivalent of approximately $91 million at October 31, 2018). This program replaced the program that
matured in December 2016. In October 2018, the commercial paper program was increased to P3.0 billion (the equivalent of
approximately $151 million at October 31, 2018).

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Borrowings Secured by Operating and Finance Leases

International Truck Leasing Corporation ("ITLC"), a special purpose, wholly-owned subsidiary of NFC, provides NFC with
another source to obtain borrowings secured by leases. The balances are classified under Financial Services operations debt as
borrowings secured by leases. ITLC's assets are available to satisfy its creditors' claims prior to such assets becoming available
for ITLC's use or to NFC or affiliated companies. For the years ended October 31, 2018 and 2017, ITLC issued new borrowings
of $38 million and $31 million, respectively. The balance of these secured borrowings issued by ITLC totaled $105 million and
$94 million as of October 31, 2018 and 2017, respectively. The carrying amount of assets used as collateral was $125 million
and $117 million as of October 31, 2018 and 2017, respectively. ITLC does not have any unsecured debt.

Future Maturities

The aggregate contractual annual maturities for debt as of October 31, 2018, are as follows:

Manufacturing
Operations (A)

Financial
Services
Operations

Total

(in millions)
2019 ....................................................................................................................... $
2020 .......................................................................................................................
2021 .......................................................................................................................
2022 .......................................................................................................................
2023 .......................................................................................................................
Thereafter ..............................................................................................................
Total debt........................................................................................................
Less: Unamortized discount and unamortized debt issuance costs .......................

Net debt .......................................................................................................... $

467
41
80
31
20
2,833
3,472
46
3,426

487
962
187
26
10
381
2,053
12
2,041

954
1,003
267
57
30
3,214
5,525
58
5,467

Debt and Lease Covenants

We have certain public and private debt agreements, including the Senior Secured Term Loan Credit Agreement, the 6.625%
Senior Notes, the loan agreements for the Tax Exempt Bonds, and the Amended and Restated Asset-Based Credit Facility,
which limit our ability to incur additional indebtedness, pay dividends, buy back our stock, and take other actions. The terms of
our 2019 Convertible Notes (the "Notes") do not contain covenants that could limit the amount of debt we may issue, or restrict
us from paying dividends or repurchasing our other securities. However, the indentures for the Notes define circumstances
under which we would be required to repurchase the Notes and include limitations on consolidation, merger, and sale of our
assets. As of October 31, 2018, we were in compliance with these covenants.

We are also required under certain agreements with public and private lenders of NFC to ensure that NFC and its subsidiaries
maintain their income before interest expense and income taxes at not less than 125% of their total interest expense. Under
these agreements, if NFC's consolidated income, including capital contributions made by NIC or NI, before interest expense
and income taxes is less than 125% of its interest expense, NIC or NI must make payments to NFC to achieve the required
ratio. During the years ended October 31, 2018, 2017, and 2016, no such payments were made.

Our Mexican financial services operations also have debt covenants, which require the maintenance of certain financial ratios.
As of October 31, 2018, we were in compliance with those covenants.

10. Postretirement Benefits

Defined Benefit Plans

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

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Obligations and Funded Status

A summary of the changes in benefit obligations and plan assets is as follows:

(in millions)
Change in benefit obligations

Pension Benefits

Health and Life
Insurance Benefits

2018

2017

2018

2017

Benefit obligations at beginning of year............................................... $
Service cost...........................................................................................
Interest on obligations...........................................................................
Actuarial loss (gain)..............................................................................
Settlements............................................................................................
Contractual termination benefits...........................................................
Curtailments and other..........................................................................
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..................................................................
Settlements............................................................................................
Currency translation..............................................................................
Employer contributions ........................................................................
Benefits paid .........................................................................................

Fair value of plan assets at end of year.......................................... $
Funded status at year end.................................................... $

3,799
7
108
(251)
(25)
—
—
(8)
—
—
(286)
3,344

2,363
(30)
(25)
(8)
132
(270)
2,162
$
(1,182) $

4,027
7
107
(18)
(52)
10
(2)
17
—
—
(297)
3,799

2,310
256
(52)
18
112
(281)
$
2,363
(1,436) $

1,435
4
43
(159)
—
—
—
—
40
42
(160)
1,245

333
4
—
—
1
(41)
297
$
(948) $

1,708
5
47
(183)
—
4
(58)
—
36
42
(166)
1,435

333
38
—
—
2
(40)
333
(1,102)

(in millions)
Amounts recognized in our Consolidated Balance Sheets consist of:

Pension Benefits

Health and Life
Insurance Benefits

2018

2017

2018

2017

Noncurrent asset ................................................................................... $
Current liability.....................................................................................
Noncurrent liability...............................................................................

Net liability recognized ................................................................. $

18
(17)
(1,183)
(1,182) $

16
(16)
(1,436)
(1,436) $

— $
(34)
(914)
(948) $

—
(41)
(1,061)
(1,102)

Amounts recognized in our accumulated other comprehensive loss consist of:
Net actuarial loss................................................................................... $
Net prior service benefit .......................................................................

Net amount recognized.................................................................. $

2,007
—
2,007

2,183
—
2,183

104
—
104

252
—
252

The accumulated benefit obligation for pension benefits, a measure that excludes the effect of prospective salary and wage
increases, was $3.3 billion and $3.8 billion for October 31, 2018 and 2017, respectively.

The cumulative postretirement benefit adjustment included in the Consolidated Statement of Stockholders' Deficit at October
31, 2018 is net of $503 million of deferred taxes related to our postretirement benefit plans.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

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 ..........................................................................................................................

As of October 31,

2018

2017

3,065

3,051

1,865

3,487

3,471

2,035

Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable
U.S. and Canadian government regulations and to make additional contributions from time to time. As of October 31, 2018, we
have met all regulatory funding requirements. In 2018, we contributed $132 million to our pension plans to meet regulatory
funding requirements. We expect to contribute approximately $140 million to our pension plans during 2019.

We primarily fund other post-employment benefit ("OPEB") obligations, such as retiree medical, in accordance with the 1993
Settlement Agreement, which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base
Trust"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of
our then applicable retiree health care and life insurance benefits. In 2018, we contributed $1 million to our OPEB plans to meet
legal funding requirements. We expect to contribute $1 million to our OPEB plans during 2019.

We have certain unfunded pension plans, under which we make payments directly to employees. Benefit payments of $16
million for both October 31, 2018 and 2017 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 $37 million and $48 million for 2018 and 2017, respectively.

Components of Net Periodic Benefit Expense and Other Amounts Recognized in Other Comprehensive Loss

The components of our postretirement benefits expense included in our Consolidated Statements of Operations consist of the
following:

(in millions)
Pension expense................................................................................................................. $
Health and life insurance expense .....................................................................................

Total postretirement benefits expense ........................................................................ $

For the Years Ended October 31,

2018

2017

2016

105

121
(3)
118

153

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Components of Net Periodic Benefit Expense

Net periodic benefit expense included in our Consolidated Statements of Operations, and other amounts recognized in our
Consolidated Statements of Stockholders' Deficit, for the years ended October 31 is comprised of the following:

(in millions)
Service cost for benefits earned during the period .................................... $
Interest on obligation.................................................................................
Amortization of cumulative loss ...............................................................
Amortization of prior service cost (benefit) ..............................................
Settlements ................................................................................................
Contractual termination benefits ...............................................................
Curtailments and other ..............................................................................
Premiums on pension insurance ................................................................
Expected return on assets ..........................................................................

Net periodic benefit expense .............................................................. $

For the Years Ended October 31,

Pension Benefits

Health and Life
Insurance Benefits

2018

2017

2016

2018

2017

2016

108

106

—

107

116

—

118

104

—

3
(161)
72

15
(157)
$ 121

15
(167)
82

—
(23)
33

—

4
(58)
—
(23)
(3) $

31
(1)
—

—

—
(26)
71

Other Changes in plan assets and benefit obligations recognized in
other comprehensive loss (income)
Actuarial net loss (gain)............................................................................. $ (61) $ (116) $ 313
(104)
Amortization of cumulative loss ...............................................................
Amortization of prior service benefit (cost) ..............................................
—
Settlements ................................................................................................
Curtailments ..............................................................................................
Currency translation ..................................................................................

—
(1)
Total recognized in other comprehensive loss (income) .................... $ (176) $ (257) $ 208

(116)
—
(23)
(2)
—

(106)
—
(9)
—

—

$ (139) $ (197) $ (115)
(31)
1

(22)
—

(9)
—

—

—
$ (148) $ (219) $ (145)

—

Total net postretirement benefits (income) expense and other
comprehensive loss (income)...................................................... $ (104) $ (136) $ 290

$ (115) $ (222) $ (74)

For the year ended October 31, 2018, we purchased a group annuity contract for certain retired pension plan participants
resulting in a plan remeasurement. As a result, a net actuarial loss of $2 million was recognized as a component of Accumulated
other comprehensive loss and a pension settlement accounting expense of $9 million was recognized in SG&A expenses in our
Consolidated Statements of Operations.

In April 2016, we filed a qualified partial wind-up report for approval by FSCO related to the 2011 closure of our Chatham,
Ontario plant. FSCO provided formal approval in January 2017. As a result of an ongoing administration review ordered in
conjunction with the partial wind-up, we recognized $1 million of contractual termination charges in the first quarter of 2017.
During the third quarter of 2017, we finalized the Chatham closure agreement. This resulted in the release of $66 million in
other postemployment benefit ("OPEB") liabilities. In addition, a pension settlement accounting charge of $23 million was
recorded as a result of lump-sum payments made to certain pension plan participants. These charges and benefits were recorded
in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. See Note 2, Restructurings
and impairments for further discussion. As a result of the pension and OPEB plan remeasurements in connection with the
finalization of the Chatham closure agreement, net actuarial gains of $21 million were recognized as a component of
Accumulated other comprehensive loss in the third quarter of 2017.

In the third quarter of 2017, we committed to a plan to cease engine production at our Melrose Park Facility in the third quarter
of fiscal year 2018. As a result, in the third quarter of 2017, we recognized $9 million of pension and $4 million of OPEB
contractual termination benefits charges and $10 million of OPEB curtailment charges. These charges were recorded in our
Truck segment within Restructuring charges in our Consolidated Statements of Operations. See Note 2, Restructurings and
impairments for further discussion. A pension curtailment gain of $2 million and net actuarial gains of $91 million resulting

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

from pension and OPEB remeasurements in connection with our Melrose Park Facility announcement were recognized as a
component of Accumulated other comprehensive loss in the third quarter of 2017.

Also, during 2017, in accordance with the intraperiod tax allocation rules, we recorded a net benefit of $28 million related to
domestic continuing operations in Income tax expense in our Consolidated Statements of Operations, and an offsetting
reduction in Other comprehensive income due to the remeasurement of certain pension and OPEB plans.

The estimated amounts for the defined benefit pension plans and the other postretirement benefit plans that will be amortized
from AOCL into net periodic benefit expense over the next fiscal year are as follows:

(in millions)
Amortization of prior service cost (benefit)........................................................................ $
Amortization of cumulative losses/(gains) .........................................................................

Pension Benefits

Health and Life
Insurance Benefits
—
(1)

— $

Cumulative unrecognized actuarial gains and losses for postretirement benefit plans, where substantially all of the plan
participants are inactive, are amortized over the average remaining life expectancy of the inactive plan participants. Otherwise,
cumulative gains and losses are amortized over the average remaining service period of active employees.

Plan amendments unrelated to negotiated labor contracts are amortized over the average remaining service period of active
employees or the remaining life expectancy of the inactive participants based upon the nature of the amendment and the
participants impacted. Plan amendments arising from negotiated labor contracts are amortized over the length of the contract.

Assumptions

The weighted average rate assumptions used in determining benefit obligations for the years ended October 31, 2018 and 2017
are:

Discount rate used to determine present value of benefit obligation at end of
year .........................................................................................................................
Expected rate of increase in future compensation levels........................................

4.4%

3.5%

4.4%

—

3.6%

—

The weighted average rate assumptions used in determining net postretirement benefits expense for 2018, 2017, and 2016 were:

Pension Benefits

Health and Life
Insurance Benefits

2018

2017

2018

2017

Pension Benefits

Health and Life Insurance
Benefits

Discount rate used to determine service cost..................................................
Discount rate used to determine interest cost .................................................
Expected long-term rate of return on plan assets............................................
Expected rate of increase in future compensation levels................................

2016

2017

2018

2018
3.9% 3.9% 4.5% 3.9% 4.0% 4.6%
3.0% 2.8% 3.1% 3.1% 2.9% 3.3%
7.2% 7.2% 7.5% 7.5% 7.5% 7.5%
3.5% 3.5% 3.5% —

2016

—

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 determine the discount rate for our pension and OPEB obligations by matching anticipated future benefit payments for the
plans to a high-quality corporate bond yield curve to establish a weighted average discount rate for each plan.

We determine our assumption as to expected return on plan assets by evaluating historical performance, investment community
forecasts, and current market conditions. We consider the current asset mix as well as our targeted asset mix when establishing
the expected return on plan assets.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Health care cost trend rates have been established through a review of actual recent cost trends and projected future trends. Our
retiree medical and drug cost trend assumptions are our best estimate of expected inflationary increases to healthcare costs. Due
to the number of former employees and their beneficiaries included in our retiree population (approximately 30,000), 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 92% of our other postretirement benefit obligation, is projected to be 14.4% in 2019 and was estimated as 7.1% for
2018. Our projections assume that the rate will decrease to 5% by the year 2023 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.............................................................................

One-Percentage
Point Increase
8
169

One-Percentage
Point Decrease

(7)
(143)

Plan Assets

The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs
used in valuation techniques (Level 1, 2 and 3). See Note 12, Fair Value Measurements, for a discussion of the fair value
hierarchy.

The following describes the methods and significant assumptions used to estimate fair value of the investments:

• Cash and short-term investments—Valued at cost plus earnings from investments for the period, which approximates fair

market value due to the short-term duration. Cash equivalents are valued at net asset value as provided by the
administrator of the fund.

• U.S. Government and agency securities—Valued at the closing price reported on the active market on which the security
is traded or valued by the trustee at year-end using various pricing services of financial institutions, including Interactive
Data Corporation, Standard & Poor's and 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, divided by the number of units outstanding.

•

Insurance Linked Securities—Valued at the net asset value provided by the administrator of the fund. The net asset value
is based on the value of the underlying assets owned by the fund, minus its liabilities, then divided by the number of units
outstanding.

• Derivatives -Valued monthly for the trustee using various pricing services of financial institutions, including Interactive
Data Corporation, Standard & Poor’s and Telekurs. Valued monthly by the trustee using various providers of derivatives
pricing, most notably Numerix, Markit and Super Derivatives.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Pension Assets

The fair value of the pension plan assets by category is summarized below:

(in millions)
Asset Category

As of October 31, 2018

As of October 31, 2017

Level
1

Level
2

Level
3

NAV

Total

Level
1

Level
2

Level
3

NAV

Total

Cash and Cash Equivalents............. $ 77

$ — $ — $ — $

$ 86

$ — $ — $ — $

Collective Trusts and Other

293

205

270

U.S. Equity......................................
Canadian Equity..............................
International Equity ........................
Global Equity..................................
Fixed Income - Long Duration
Credit .............................................. —
Fixed Income - Long Duration
Government .................................... —
Fixed Income - Intermediate
Duration Government ..................... —
Fixed Income - High Yield ............. —
Fixed Income - Canadian Bond ...... —
Global Real Estate .......................... —
Global Infrastructure....................... —
Insurance linked Securities ............. —
Hedge Fund of Funds...................... —
Private Equity ................................. —
Private Credit .................................. —
Real Estate ...................................... —
Total(A) ..................................... $ 861

— —

283

156

—

48 —
—

157

194

135

—

— —

—

—
—

—

— — 202

— —

293

270

205

283

156

157

194

135

202

316

327

235

—

— —

508

—

20 —

— —

214

213

144

—

— —

—

— — 210

— —

—

316

327

235

508

—

214

213

144

—

210

—

— —

—
$ — $ 310

$ 973

—
$ 2,144

—
$ 983

—
$ 1,099

1
$ 1

—
$ 263

1
$ 2,346

___________________
(A)

In addition, the table above includes the fair value of Canadian pension assets translated at the exchange rates as of October 31, 2018 and 2017,
respectively, while the change in plan asset table includes the fair value of Canadian pension assets translated at historical foreign currency rates.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Other Postretirement Benefits

The fair value of other postretirement benefit plan assets by category is summarized below:

(in millions)
Asset Category

As of October 31, 2018

As of October 31, 2017

Level
1

Level
2

Level
3

NAV

Total

Level
1

Level
2

Level
3

NAV

Total

Cash and Cash Equivalents ........... $ 11

$ — $ — $ — $

Fixed Income

U.S. Credit Bonds.......................... —
—
Corporate and Government Bonds
Government Bonds........................ —

Collective Trusts and Other

59
U.S. Equity ....................................
59
International Equity .......................
9
Fixed Income - Multi-Asset Credit
Real Estate (REITs) ....................... —
Mutual Fund .................................. —
Insurance Linked Securities .......... —
Hedge Fund of Funds .................... —
Private Equity ................................ —
Total........................................ $ 138

61
—
—

—
—
17
—
—
—
—
—
78

—
—
—

61
—
—

—
—
—
—
—
—
—
—

—
—
—
26
—
8
39
8
$ — $ 81

59
59
26
26
—
8
39
8
$ 297

—
—
—

71
74
—
—
9
—
—
—
$ 160

—
62
8

—
—
29
—
—
—
—
—
99

—
—
—

—
62
8

—
—
—
—
—
—
—
—

—
—
—
24
—
—
39
11
$ — $ 74

71
74
29
24
9
—
39
11
$ 333

The investment strategy of the postretirement pension plans (the "Plans") is based on many factors including broad economic
factors, historical and prospective information regarding capital market performance, investment strategies available to an asset
pool of this size, the current regulatory environment, the Plans’ liabilities and the expected interaction between assets and
liabilities. The primary objective of the strategy is to manage assets in such a way that will allow the eventual satisfaction of
obligations to the Plans’ participants and beneficiaries. To meet the primary objective the portfolios will be structured to provide
liquidity to meet the Plans’ benefit payment obligations and administration expenses, offer a reasonable probability of achieving
growth in assets that will assist in closing the Plans’ funding gap and enable the Plans to satisfy their liabilities.

Given the relationship between risk and return a moderately aggressive risk profile was implemented. Primary emphasis is to
strike a balance between portfolio stability and portfolio appreciation.

In line with the Plans' return objectives and risk parameters, target asset allocations, which were established following a 2015
asset liability study, are approximately 70% return-seeking assets and 30% liability-hedging assets. The return-seeking assets
include long only equities (both active and passive, domestic and international, across the capitalization range) to capture long-
term growth opportunities, hedge fund of funds to diversify the equity beta, return seeking credit (including high yield debt,
emerging market debt and bank loans) to provide a meaningful level of absolute return and diversify equity beta, global real
estate to diversify the equity beta and private equity. The liability-hedging assets are invested in high-quality, investment grade
bonds with durations that approximate the durations of the liabilities. The objective of the liability hedging assets is to dampen
the Plans’ surplus volatility.

All assets are managed by external investment managers. Each investment manager is expected to prudently manage the assets
in a manner consistent with the investment objectives, guidelines, and constraints outlined in their Investment Management
Agreements and the Investment Policy Statement. Managers are not permitted to invest outside of the asset class mandate (e.g.,
equity, fixed income, alternatives) or strategy for which they are appointed.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Expected Future Benefit Payments

The expected future benefit payments for the years ending October 31, 2019 through 2023 and the five years ending
October 31, 2028 are estimated as follows:

(in millions)
2019............................................................................................................................. $
2020.............................................................................................................................
2021.............................................................................................................................
2022.............................................................................................................................
2023.............................................................................................................................
2024 through 2028 ......................................................................................................
________________________
(A) Payments are net of expected participant contributions and expected federal subsidy receipts.

Defined Contribution Plans and Other Contractual Arrangements

Pension Benefit
Payments

Other Postretirement
Benefit Payments(A)

283
278
271
264
257
1,173

76
85
91
93
95
454

Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented
employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution
from the Company. We deposit the matching contribution annually. Many participants covered by the plans receive annual
Company contributions to their retirement accounts based on an age-weighted percentage of the participant's eligible
compensation for the calendar year. Defined contribution expense pursuant to these plans was $33 million in 2018, and $29
million in both 2017 and 2016.

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

Our contingent profit sharing obligations under a certain Supplemental Benefit Trust Profit Sharing Plan ("Supplemental
Benefit Trust Profit Sharing Plan") will continue until certain funding targets defined by the 1993 Settlement Agreement are
met. In 2018, we recorded $30 million in profit sharing accruals based on the operating performance of the entities that are
included in the determination of qualifying profits. For more information on pending arbitration regarding the Supplemental
Benefit Trust Profit Sharing Plan, see Note 13, Commitments and Contingencies.

11. Income Taxes

On December 22, 2017, the Tax Act was signed into U.S. law. The Tax Act reduces the statutory corporate income tax rate from
35% to 21%, effective January 1, 2018. In accordance with the Internal Revenue Code, we have utilized a blended rate of
23.3% for our fiscal 2018 tax year by applying a prorated percentage of the number of days prior to and subsequent to the
January 1, 2018 effective date. This rate reduction requires us to remeasure our deferred taxes as of the date the Tax Act was
enacted. Our U.S. deferred tax assets, net of deferred tax liabilities, were remeasured and reduced by $983 million, entirely
offset by a valuation allowance reduction. As a result, the remeasurement of our deferred tax assets, net of deferred tax
liabilities, including the valuation allowance, did not impact our income tax expense or net income.

The Tax Act includes a mandatory deemed repatriation of earnings of the Company’s foreign subsidiaries. We have
provisionally calculated and included $147 million of foreign earnings in taxable income due to this deemed repatriation. The
income tax effect of the deemed repatriation will be offset with existing deferred tax assets. The deferred tax impact has a
valuation allowance offset, resulting in no impact on our income tax expense or net income.

The Tax Act also adds many new provisions, including changes to limits on the deductions for executive compensation and
interest expense, a tax on global intangible low taxed income (“GILTI”), the base erosion anti
abuse tax (“BEAT”) and a
deduction for foreign derived intangible income (“FDII”). We are still evaluating the impact of these provisions of the Tax Act,
which do not apply until our taxable year beginning November 1, 2018. Companies can either account for taxes on GILTI as
incurred or recognize deferred taxes when basis differences exist that are expected to affect the amount of the GILTI inclusion
upon reversal. The Company is electing to account for taxes on GILTI as incurred.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

We have not completed our accounting for the income tax effects of the Tax Act. However, we have computed estimates or
“provisional” amounts as permitted by the SEC’s Staff Accounting Bulletin No. 118 (“SAB”) issued on December 22, 2017.
Under the SAB, companies are allowed a measurement period of up to one year from the date of enactment to complete the
accounting for the effects of the Tax Act. We will continue to evaluate the Tax Act’s impact, which may change as a result of
additional Treasury guidance, federal or state legislative actions, or changes in accounting standards or related interpretations.
The Company’s analyses performed to date are sufficient to calculate a reasonable estimate of the impacts of the Tax Act.

The following table presents the domestic and foreign components of Income (loss) from continuing operations before income
taxes in our Consolidated Statements of Operations:

(in millions)
Domestic............................................................................................................................ $
Foreign...............................................................................................................................

Income (loss) from continuing operations before income taxes ................................ $

For the Years Ended October 31,

2018

2017

2016

246
174
420

(74) $
138
64

(95)
63
(32)

The following table presents the components of Income tax expense in our Consolidated Statements of Operations:

(in millions)
Current:

Federal ........................................................................................................................ $
State and local ............................................................................................................
Foreign .......................................................................................................................

Total current expense............................................................................................. $

Deferred:

Total deferred benefit (expense).......................................................................... $
Total income tax expense............................................................................. $

For the Years Ended October 31,

2018

2017

2016

— $
(1)
(47)
(48) $

2
(1)
(5)
(4) $
(52) $

4
10
(30)
(16) $

19
4
(17)
6
$
(10) $

(1)
(4)
(36)
(41)

13
(1)
(4)
8
(33)

The following table presents a reconciliation of statutory federal income tax benefit (expense) recorded in Income tax expense
in our Consolidated Statements of Operations:

(in millions)
Federal income tax benefit (expense)(A) ............................................................................ $
State income taxes, net of federal benefit..........................................................................
Credits and incentives........................................................................................................
Adjustments to valuation allowances ................................................................................
Foreign operations .............................................................................................................
Unremitted foreign earnings..............................................................................................
Adjustments to uncertain tax positions..............................................................................
Intraperiod tax allocation offset to equity components .....................................................
Non-controlling interest adjustment ..................................................................................
Tax Act Mandatory Repatriation .......................................................................................
Tax Act US Deferred Remeasurement
Other ..................................................................................................................................

Recorded income tax expense .................................................................................... $

_________________________

For the Years Ended October 31,

2018

2017

2016

(98) $
(3)
(50)
1,120
(2)
—
(1)
—
6
(34)
(983)
(7)
(52) $

(22) $
(3)
8
(57)
4
—
15
28
9
—
—
8
(10) $

11
(3)
3
(132)
53
37
(10)
—
11
—
—
(3)
(33)

(A)

Federal income tax benefit (expense) was taxed at a rate of 23.3% for the year ended 2018, and 35% for the years ended 2017 and 2016.
99

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The tax effect of pretax income or loss from continuing operations generally should be determined by a computation that does
not consider the tax effects of items that are not included in continuing operations. An exception to that incremental approach is
applied when there is a loss from continuing operations and income in another category of earnings (for example, discontinued
operations, other comprehensive income, additional paid in capital, etc.). In that situation, a tax provision is first allocated to the
other categories of earnings. A related tax benefit is then recorded in continuing operations. This exception to the general rule
applies even when a valuation allowance is in place at the beginning and end of the year. While intraperiod tax allocations do
not change the overall tax provision, it may result in a gross-up of the individual components, thereby changing the amount of
tax provision included in each category of income. During 2017, we recorded a $28 million intraperiod allocation benefit in
domestic continuing operations associated with certain post retirement plan remeasurement gains.

Not including the effect of the federal income tax rate change, we recognized an income tax benefit of $137 million and income
tax expense of $57 million, for the change in the valuation allowance for the years ended October 31, 2018 and 2017,
respectively.

At October 31, 2018, undistributed earnings of foreign subsidiaries were $308 million. Except for the tax effect of the Tax Act
deemed repatriation, income taxes have not been provided on foreign undistributed earnings because they are either considered
to be permanently invested in foreign subsidiaries or are expected to be repatriated without significant incremental U.S. federal,
state or foreign withholding taxes. It is impracticable to determine the exact amount of unrecognized deferred tax liabilities.

The following table presents the components of the deferred tax asset (liability):

(in millions)
Deferred tax assets attributable to:

As of October 31,

2018

2017

Employee benefits liabilities............................................................................................................ $
Net operating loss ("NOL") carryforwards......................................................................................
Product liability and warranty accruals............................................................................................
Research and development ..............................................................................................................
Tax credit carryforwards..................................................................................................................
Other ................................................................................................................................................
Gross deferred tax assets ..........................................................................................................
Less: Valuation allowances..............................................................................................................

Net deferred tax assets .............................................................................................................. $

615
979
172
114
212
238
2,330
2,182
148

1,073
1,383
290
209
262
277
3,494
3,326
168

Deferred tax liabilities attributable to:

Other ................................................................................................................................................ $
Total deferred tax liabilities ...................................................................................................... $

(27) $
(27) $

(39)
(39)

At October 31, 2018, deferred tax assets attributable to NOL carryforwards include $560 million attributable to U.S. federal
NOL carryforwards, $178 million attributable to state NOL carryforwards, and $241 million attributable to foreign NOL
carryforwards. If not used to reduce future taxable income, U.S. federal NOLs are scheduled to expire beginning in 2032. State
NOLs can be carried forward for initial periods of 5 to 20 years, and are scheduled to expire in 2019 to 2038. Approximately
one fourth of our foreign net operating losses will expire, beginning in 2029, while the majority of the remaining balance has no
expiration date. The majority of our tax credits can be carried forward for initial periods of 20 years and are scheduled to expire
between 2019 and 2038.

A valuation allowance is required to be established or maintained when, based on currently available information, it is more
likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes
provides important factors in determining whether a deferred tax asset will be realized, including whether there has been
sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to
utilize the deferred tax asset.

For the year ended October 31, 2018, we have evaluated the need to maintain a valuation allowance for deferred tax assets
based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation
of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing
the need for a valuation allowance.

100

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

We earned domestic income from continuing operations for the year ended October 31, 2018 and incurred domestic losses from
continuing operations for the years ended October 31, 2017 and 2016. The positive evidence of domestic income from the year
ended October 31, 2018 does not outweigh the negative evidence of cumulative losses from prior years. The qualitative and
quantitative analysis of current and expected domestic earnings, industry volumes, tax planning strategies, and general business
risks resulted in a more likely than not conclusion of not being able to realize a significant portion of our deferred tax assets as
of October 31, 2018.

We have evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is
more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate
consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. We
continue to maintain a valuation allowances on the majority of our U.S. deferred tax assets as well as certain foreign deferred
tax assets that we believe, on a more-likely-than-not basis, will not be realized based on current forecasted results. For all
remaining deferred tax assets, while we believe that it is more likely than not that they will be realized, we believe that it is
reasonably possible that additional deferred tax asset valuation allowances could be required in the next twelve months.

The total deferred tax asset valuation allowances were $2.2 billion and $3.3 billion at October 31, 2018 and 2017, respectively.
In the event we released all of our valuation allowances, almost all would impact income taxes as a benefit in our Consolidated
Statements of Operations.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in
the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement. As of October 31, 2018, the amount of liability for uncertain tax
positions was $27 million. The liability at October 31, 2018 has a recorded offsetting tax benefit associated with various issues
that total $9 million. If the unrecognized tax benefits are recognized, all would impact our effective tax rate, except for
positions for which we maintain a full valuation allowance against certain deferred tax assets. In this case, the effect may be in
the form of an increase in the deferred tax asset related to our net operating loss carryforward, which would be offset by a full
valuation allowance.

Changes in the liability for uncertain tax positions are summarized as follows:

(in millions)
Liability for uncertain tax positions at November 1 ....................................................................... $
Additions as a result of positions taken in prior periods..........................................................
Decrease as a result of positions taken in prior periods...........................................................
Settlements...............................................................................................................................
Liability for uncertain tax positions at October 31 ......................................................................... $

2018

2017

34
2
(7)
(2)
27

50
—
(15)
(1)
34

For the years ended October 31,

We recognize interest and penalties related to uncertain tax positions as part of Income tax expense. Total interest and penalties
related to our uncertain tax positions resulted in income tax benefits of $1 million and $6 million and income tax expense of
less than $1 million for the years ended October 31, 2018, 2017, and 2016, respectively. The total interest and penalties accrued
were $3 million and $4 million for the years ended October 31, 2018 and 2017, respectively. We released $14 million of
uncertain tax positions based on administrative practice and precedents of relevant tax authorities in 2017.

We have open tax years back to 2001 with various significant taxing jurisdictions including the U.S., Canada, Mexico, and
Brazil. In connection with the examination of tax returns, contingencies may arise that generally result from differing
interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenues or expenses
in taxable income, or the sustainability of tax credits to reduce income taxes payable. 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.

101

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

12. Fair Value Measurements

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

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

• Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that

are not active, or model-derived valuations, all of whose significant inputs are observable, and

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

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

Cash Equivalents and Restricted Cash Equivalents—Cash equivalents are highly liquid investments with an original maturity
of 90 days or less which may include U.S. government and federal agency securities, commercial paper, and other highly liquid
investments. The carrying amounts of cash and cash equivalents and restricted cash approximate fair value because of the short-
term maturity and highly liquid nature of these instruments.

Marketable Securities—Our marketable securities portfolios are classified as available-for-sale and may include investments in
U.S. government and federal agency securities, commercial paper and other investments with an original maturity greater than
90 days. We use quoted prices from active markets to determine fair value.

Derivative Assets and Liabilities—We measure the fair value of derivatives assuming that the unit of account is an individual
derivative transaction and that each derivative could be sold or transferred on a stand-alone basis. We classify within Level 2
our derivatives that are traded over-the-counter and valued using internal models based on observable market inputs.

Guarantees—We provide certain guarantees of payments and residual values, to which losses are generally capped, to specific
counterparties. The fair value of these guarantees includes a contingent component and a non-contingent component that are
based upon internally developed models using unobservable inputs. We classify these liabilities within Level 3. For more
information regarding guarantees, see Note 13, Commitments and Contingencies.

Impaired Finance Receivables and Impaired Assets Under Operating Leases—Fair values of the underlying collateral are
determined by current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various
market channels. For more information regarding impaired finance receivables, see Note 4, Allowance for Doubtful Accounts,
and for more information regarding impaired assets under operating leases, see Note 2, Restructuring and Impairments.

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

102

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

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

(in millions)
Assets
Marketable securities:

As of October 31, 2018

As of October 31, 2017

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

U.S. government and federal agency
securities.................................................. $

Derivative financial instruments:

101

$ — $ — $

101

370

$ — $ — $

370

Commodity forward contracts(A).............
Foreign currency contracts(A) ..................
Interest rate caps(B) ..................................

—

Total assets....................................... $

101

—

$ — $

105

370

Liabilities
Derivative financial instruments:

Commodity forward contracts(C) ............. $ — $ — $ — $ — $ — $
Foreign currency contracts(C) ..................
—
Guarantees ......................................................

—

Total liabilities ................................. $ — $ — $

$ — $

—

$ — $

377

$ — $

—

_________________________
(A) The asset value of commodity forward contracts and foreign currency contracts is included in Other current assets in the accompanying Consolidated

Balance Sheets.

(B) The asset value of interest rate caps is included in Other noncurrent assets in the accompanying Consolidated Balance Sheets.
(C) The liability value of commodity forward contracts and foreign currency contracts is included in Other current liabilities in the accompanying

Consolidated Balance Sheets.

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

(in millions)
Guarantees, at beginning of period .......................................................................................................... $
Transfers out of Level 3....................................................................................................................

Issuances ...........................................................................................................................................

Settlements........................................................................................................................................
Guarantees, at end of period .................................................................................................................... $
Change in unrealized gains on assets (liabilities) still held ..................................................................... $

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

October 31,
2018

October 31,
2017

(21) $
—
(7)
4
(24) $
— $

(23)
—
(2)
4
(21)
—

(in millions)
Level 2 financial instruments

October 31,
2018

October 31,
2017

Impaired finance receivables (A)....................................................................................................... $
Specific loss reserve.........................................................................................................................

Fair value .................................................................................................................................. $

20
(9)
11

16
(7)
9

_________________________
(A) Certain impaired finance receivables are measured at fair value on a nonrecurring basis. An impairment charge is recorded for the amount by which the
carrying value of the receivables exceeds the fair value of the underlying collateral, net of remarketing costs. Fair values of the underlying collateral are
determined by reference to dealer vehicle value publications adjusted for certain market factors.

In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we
use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to
market on a recurring basis. The carrying amounts of Cash and cash equivalents, Restricted cash, and Accounts payable
approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables
generally consist of retail and wholesale accounts and notes. The carrying amounts of Trade and other receivables and retail

103

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of
wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their variable interest
rate terms. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts
presented in the table below.

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

The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. The 6.75% Tax
Exempt Bonds, due 2040, are traded, but the trading market is illiquid, and as a result, the Loan Agreement underlying the Tax
Exempt Bonds is classified as Level 2. Trading in our 6.625% Senior Notes is limited to qualified institutional buyers; therefore
the notes are classified as Level 2. The fair values of our Level 3 debt instruments are generally determined using internally
developed valuation techniques such as discounted cash flow modeling. Inputs such as discount rates and credit spreads reflect
our estimates of assumptions that market participants would use in pricing the instrument and may be unobservable.

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

(in millions)
Assets

As of October 31, 2018

Estimated Fair Value

Level 1

Level 2

Level 3

Total

Carrying
Value

Retail notes............................................................................................. $ — $ — $

180

183

Liabilities

Debt:

Manufacturing operations

Senior Secured Term Loan Credit Agreement, due 2025.......................
6.625% Senior Notes, due 2026 .............................................................
4.75% Senior Subordinated Convertible Notes, due 2019(A) .................
Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040 .........
Financed lease obligations .....................................................................
Other.......................................................................................................

Financial Services operations

Asset-backed debt issued by consolidated SPEs, due serially through
2023........................................................................................................

Senior secured NFC Term Loan, due 2025 ............................................

Bank credit facilities, due dates from 2019 through 2024 .....................
Commercial paper, program matures in 2022 ........................................
Borrowings secured by operating and finance leases, due serially
through 2024 ..........................................................................................

—

— 1,597

1,597

— 1,122
—
412

— 1,122
412
—

—

—
75

—

235

—

—
—

—

122

949

400

511
—

104

235

122

949

400

511
75

104

1,570

1,083
405

220

122

948

394

519
75

105

104

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

As of October 31, 2017

Estimated Fair Value

Level 1

Level 2

Level 3

Total

Carrying
Value

(in millions)
Assets

Retail notes............................................................................................. $ — $ — $

153

161

Liabilities

Debt:

Manufacturing operations

Senior Secured Term Loan Credit Facility, due 2020 ............................
8.25% Senior Notes, due 2022 ...............................................................
4.50% Senior Subordinated Convertible Notes, due 2018(A) .................
4.75% Senior Subordinated Convertible Notes, due 2019(A) .................
Loan Agreement related to 6.50% Tax Exempt Bonds, due 2040 .........
Financed lease obligations .....................................................................
Other.......................................................................................................

—

1,450

208

446

—

Financial Services operations

Asset-backed debt issued by consolidated SPEs, due serially through
2023........................................................................................................

—

— 1,019

1,019

—

243

—

— 1,450

—

130

851

592

—

208

446

243

130

851

592

1,003

1,423

194

394

220

130

849

616

_________________________
(A) The carrying value represents the consolidated financial statement amount of the debt which excludes the allocation of the conversion feature to equity,

while the estimated fair value is derived from quoted prices in active markets which include the equity feature.

13. Commitments and Contingencies

Guarantees

We occasionally provide guarantees that could obligate us to make future payments if the primary entity fails to perform under
its contractual obligations. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as
they meet the recognition and measurement provisions of U.S. GAAP. In addition to the liabilities that have been recognized,
we are contingently liable for other potential losses under various guarantees. We do not believe that claims that may be made
under such guarantees would have a material effect on our financial condition, results of operations, or cash flows.

Under the terms of the Navistar Capital Operating Agreement, Navistar Capital, (a program of BMO Harris Bank N.A. and
Bank of Montreal (together “BMO”)) is our third-party preferred source of retail and lease customer financing for equipment
offered by us and our dealers in the U.S. The Navistar Capital Operating Agreement contains a loss sharing arrangement for
certain credit losses. Under the loss sharing arrangement, as amended, we reimburse BMO for credit losses in excess of the first
10% of the financed value of a contract; for certain leases we reimburse BMO for credit losses up to a maximum of the first
9.5% of the financed value of those lease contracts. Our exposure to loss is mitigated because contracts under the Navistar
Capital Operating Agreement are secured by the financed equipment. There were $1.5 billion and $1.4 billion of outstanding
loan principal and operating lease payments receivable at October 31, 2018 and 2017, respectively, financed through the
Navistar Capital Operating Agreement and subject to the loss sharing arrangements in the U.S. The related financed values of
these outstanding contracts were $2.5 billion and $2.4 billion at October 31, 2018 and 2017, respectively. Generally, we do not
carry the contracts under the Navistar Capital Operating Agreement on our Consolidated Balance Sheets. However, for certain
Navistar Capital financed contracts which we have accounted for as borrowings, we have recognized equipment leased to
others of $104 million and $116 million and financed lease obligations of $122 million and $129 million, in our Consolidated
Balance Sheets as of October 31, 2018 and 2017, respectively.

We also have issued a limited number of residual value guarantees, for which losses are generally capped. If substantial risk of
loss has not transferred, we account for these arrangements as operating leases and revenue is recognized on a straight-line
basis over the term of the lease. If substantial risk of loss has transferred, revenue is recognized upon sale and the amounts of

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the guarantees are estimated and recorded. Our guarantees are contingent upon the fair value of the leased assets at the end of
the lease term. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet
recognition and measurement provisions. In addition to the liabilities that have been recognized, we are contingently liable for
other potential losses under various guarantees that are not recognized in our Consolidated Balance Sheets. We do not believe
claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or
cash flows.

We obtain certain stand-by letters of credit and surety bonds from third-party financial institutions in the ordinary course of
business when required under contracts or to satisfy insurance-related requirements. As of October 31, 2018, the amount of
stand-by letters of credit and surety bonds issued was $122 million.

In addition, as of October 31, 2018, we have $162 million of outstanding purchase commitments and contracts with $16 million
of cancellations fees with expiration dates through 2026. We have entered into industrial participation agreements, commonly
known as offset agreements, with customers outside of the U.S. to facilitate economic value back to entities within the foreign
nations as the result of their procurement of goods and services from us. These commitments may be satisfied by our placement
of supply contracts to established companies within the foreign nations, providing capabilities to the foreign nations, or the
creation of joint ventures that generate profits and hire nationals from within the foreign nations. In certain cases, penalties
could be imposed if we do not meet our industrial participation commitments. As of October 31, 2018, we have outstanding
industrial participation agreements totaling $228 million that extend through 2026. Purchase order commitments associated
with fulfilling the industrial participation agreements are included in the purchase commitments amount above.

In the ordinary course of business, we also provide routine indemnifications and other guarantees, the terms of which range in
duration and often are not explicitly defined. We do not believe these will result in claims that would have a material impact on
our financial condition, results of operations, or cash flows.

Environmental Liabilities

We have been named a potentially responsible party ("PRP"), in conjunction with other parties, in a number of cases arising
under an environmental protection law, the Comprehensive Environmental Response, Compensation, and Liability Act,
popularly known as the "Superfund" law. These cases involve sites that allegedly received wastes from current or former
Company locations. Based on information available to us which, in most cases, consists of data related to quantities and
characteristics of material generated at current or former Company locations, material allegedly shipped by us to these disposal
sites, as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable
estimate is calculated of our share of the probable costs, if any, and accruals are recorded in our consolidated financial
statements. These accruals are generally recognized no later than upon completion of the remedial feasibility study and are not
discounted to their present value. We review all accruals on a regular basis and believe that, based on these calculations, our
share of the potential additional costs for the cleanup of each site will not have a material effect on our financial condition,
results of operations, or cash flows.

In addition, other sites formerly owned by us or where we are currently operating have been identified as having soil and
groundwater contamination. While investigations and cleanup activities continue at these sites, we believe that we have
appropriate accruals to cover costs to complete the cleanup of all sites.

We have accrued $18 million for these and other environmental matters, which are included within Other current liabilities and
Other noncurrent liabilities, as of October 31, 2018. The majority of these accrued liabilities are expected to be paid subsequent
to 2019.

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

Legal Proceedings

Overview

We are subject to various claims arising in the ordinary course of business and are party to various legal proceedings that
constitute ordinary, routine litigation incidental to our business. The majority of these claims and proceedings relate to

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commercial, product liability, and warranty matters. In addition, from time to time we are subject to various claims and legal
proceedings related to employee compensation, benefits, and benefits administration including, but not limited to, compliance
with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Department of Labor requirements.

In our opinion, apart from the actions set forth below, the disposition of these proceedings and claims, after taking into account
recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on our
business or our financial condition, results of operations, or cash flows.

Profit Sharing Disputes

Pursuant to the 1993 Settlement Agreement, the program administrator and named fiduciary of the Supplemental Benefit
Program is the Supplemental Benefit Program Committee (the "Committee"), composed of individuals not appointed by NI or
NIC. In August 2013, the Committee filed a motion for leave to amend its February 2013 complaint (which sought injunctive
relief for the Company to provide certain information to which it was allegedly entitled under the Supplemental Benefit Trust
Profit Sharing Plan) and a proposed amended complaint (the "Profit Sharing Complaint") in the U.S. District Court for the
Southern District of Ohio (the "Court"). Leave to file the Profit Sharing Complaint was granted by the Court in October 2013.
In its Profit Sharing Complaint, the Committee alleged the Company breached the 1993 Settlement Agreement and violated
ERISA by failing to properly calculate profit sharing contributions due under the Supplemental Benefit Trust Profit Sharing
Plan. The Committee seeks damages in excess of $50 million, injunctive relief and reimbursement of attorneys' fees and costs.
Following the resolution of a procedural dispute by the U.S. Court of Appeals for the 6th Circuit, in May 2015, the Court
ordered that the claims in the Profit Sharing Complaint be arbitrated pursuant to the dispute resolution procedures in the
Supplemental Benefit Trust Profit Sharing Plan. In November 2015, the Company and the Committee selected an arbitrator and
the discovery process commenced. On August 1, 2016, the parties submitted briefs on issues related to the scope of the
arbitration. On June 29, 2017, the arbitrator ruled, among other things, that the arbitration will include Supplemental Benefit
Trust Profit Sharing Plan calculations for the years ending October 31, 2001 through October 31, 2014. On May 2, 2018, the
Committee submitted to the arbitrator a proposed schedule for the presentation of the issues to be addressed in the arbitration.
On September 21, 2018, the arbitrator set a schedule to rule on all issues and determine final calculations in April 2020. As
noted under “Retiree Health Care Litigation” below, on August 14, 2018, the Company filed a motion to schedule a status
hearing, in which the Company requested an in-person hearing to discuss global resolution of various disputes under the 1993
Settlement Agreement, including the pending Profit Sharing Complaint. As a result, an in-person hearing was held on
November 2, 2018, and subsequent hearings may follow.

In addition, various local bargaining units of the UAW have filed separate grievances pursuant to the profit sharing plans under
various collective bargaining agreements in effect between the Company and the UAW that may have similar legal and factual
issues as the Profit Sharing Complaint.

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

Retiree Health Care Litigation

On October 21, 2016, two lawsuits were filed in the U.S. District Court for the Southern District of Ohio relating to
postretirement healthcare and life insurance obligations under the 1993 Settlement Agreement. The first lawsuit (the
“Committee’s Complaint”) was filed by the Supplemental Benefit Program Committee.

The Committee’s Complaint was filed against NIC, NI, NFC and a former affiliate, all of which are parties to the 1993
Settlement Agreement. Since January 1, 2012, the Navistar, Inc. Retiree Health Benefit Trust, created pursuant to the 1993
Settlement Agreement (the “Base Trust”), has received certain Medicare Part D subsidies from the federal Centers for Medicare
and Medicaid Services that were made available for prescription drug benefits provided to Medicare-eligible seniors pursuant to
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and has also received certain Medicare Part D
coverage-gap discounts from prescription drug manufacturers that were made available to eligible seniors pursuant to the
Patient Protection and Affordable Care Act (collectively, the “Subsidies”).

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

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The second lawsuit was filed by two individual members of the Committee (the “Committee Members”) who are retirees and
participants in the Navistar, Inc. Health Benefit and Life Insurance Plan (the “Plan”) created pursuant to the 1993 Settlement
Agreement. The Committee Members’ complaint (the “Committee Members’ Complaint”) was filed against NIC, NI, NFC and
certain other former or current affiliates, all of which are parties or employers as defined in the 1993 Settlement
Agreement. The Committee Members allege, among other things, that the Company violated the terms of the Plan, breached a
fiduciary duty under ERISA, and engaged in ERISA-prohibited transactions by improperly using the Plan’s assets (a portion of
the Subsidies) for the Company’s benefit.

The Committee Members request that the court order the defendants to restore all losses to the Base Trust, including
approximately $26 million, which the Committee Members allege is the Plan participants’ “fair share” of the Subsidies that
were allegedly misappropriated by the defendants from January 2012 through April 2015. The Committee Members also
request that the court enjoin the defendants from alleged future violations of the Plan and ERISA with respect to treatment of
the Subsidies, order the defendants to remedy all alleged ERISA-prohibited transactions and pay the Committee Members’
attorneys’ fees and costs.

The defendants filed motions to dismiss each respective complaint on January 10, 2017. On May 10, 2017, the court dismissed
the Committee's Complaint with prejudice, stating that the Committee lacked standing to bring its claims. With respect to the
Committee Members’ Complaint, the court declined to dismiss the complaint, but ordered the parties to conduct discovery
regarding whether the Committee Members’ Complaint is barred by the applicable statute of limitations and to file a motion for
summary judgment thereafter on that issue of timeliness. The defendants filed their motion for summary judgment on
September 21, 2017, the Committee Members’ filed their opposition on November 2, 2017, and the defendants filed their reply
on November 22, 2017. On June 26, 2018, the court conditionally overruled the defendants’ motion for summary judgment.
The court bifurcated the case and conducted a trial on the issue of whether the Committee Members’ Complaint is barred by the
applicable statute of limitations in September 2018. On November 20, 2018, the Committee Members filed a motion for
sanctions, alleging various discovery and trial misconduct by the defendants and requesting that the court enter judgment in
favor of the Committee Members with respect to the statute of limitations issue and award attorneys’ fees to the Committee
Members. On December 11, 2018, the defendants filed their opposition to the Committee Members’ motion for sanctions.

On August 14, 2018, under the original Shy et. al. v. Navistar International Corporation, Civil Action No. 3:92-CV-333 (S.D.
Ohio 1992), we filed a motion to schedule a status hearing to request an in-person hearing to discuss global resolution of
various disputes under the 1993 Settlement Agreement, including but not limited to resolving the pending Profit Sharing
Complaint and Committee Members’ Complaint described above. As a result, an in-person hearing was held on November 2,
2018, and subsequent hearings are expected to follow.

FATMA Notice

International Indústria Automotiva da América do Sul Ltda. ("IIAA"), formerly known as Maxion International Motores S/A
("Maxion"), now a wholly owned subsidiary of the Company, received a notice (the “FATMA Notice”) in July 2010 from the
State of Santa Catarina Environmental Protection Agency ("FATMA") in Brazil. The FATMA Notice alleged that Maxion sent
waste to a facility owned and operated by a company known as Natureza (the “Natureza Facility”) and that soil and
groundwater contamination had occurred at the Natureza Facility.

The FATMA Notice asserted liability against Maxion and assessed an initial penalty in the amount of R$2 million (the
equivalent of approximately less than US$1 million at October 31, 2018), which is not due and final until all administrative
appeals are exhausted. Maxion was one of numerous companies that received similar notices. IIAA filed an administrative
defense in August 2010 and has not yet received a decision following that filing.

In addition to the matter described above, there is a suit pending in the federal court of Brazil in which the federal district
attorney has sued (a) FATMA, for claims related to FATMA’s actions in connection with licensing and inspection procedures
related to the Natureza Facility, and (b) Selamix, as the current owner of the Natureza Facility. In this federal suit, Selamix was
found liable for the contamination at the Natureza Facility due to it being the successor owner of the facility. However, the
federal court’s decision does not prohibit Selamix from seeking to recover its damages from third parties that contributed to the
contamination at the Natureza Facility.

In connection with the FATMA Notice, IIAA presented a motion to the district attorney of the State of Santa Catarina (the “SC
District Attorney”) to set forth its defenses and correct inaccuracies in the FATMA Notice in August 2017. In September 2017,
the SC District Attorney informed IIAA that it intended to present a Consent Agreement to all of the companies that sent waste
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Notes to Consolidated Financial Statements—(Continued)

to Natureza to determine the allocation of the liability for generating the waste which led to the contamination of the Natureza
Facility. IIAA then filed a motion requesting that the SC District Attorney consider certain facts and circumstances prior to
presenting the Consent Agreement.

In January 2018, the SC District Attorney, local and state authorities, Selamix, IIAA and the 14 other companies that are alleged
to have significantly contributed to the contamination met to discuss the matter. Selamix then presented three proposals for
conducting a preliminary environmental assessment in the area to determine the allocation of liability among the companies. In
March 2018, Selamix informed the SC District Attorney that it would voluntarily conduct a preliminary environmental study at
the Natureza Facility in an attempt to determine and allocate the liability for the contamination pursuant to an agreement with
all of the companies after the study is completed. The SC District Attorney agreed to suspend further inquiry into the matter
until Selamix’s study had been completed. The other companies involved in the matter have expressed an interest in having an
independent environmental study conducted. The SC District Attorney has indicated that it may consider requiring an
independent environmental study after Selamix’s environmental study is completed.

In June 2018, Selamix presented its Environmental Preliminary Assessment Report to the SC District Attorney and the other
companies alleged to have contributed to the contamination and the report indicated that the entire property should be subject to
further studies to confirm the type and extent of the contamination due to signs of buried residues in several areas. Selamix also
presented commercial proposals from two additional different companies specializing in environmental studies to perform the
next steps of the technical work. The SC District Attorney then requested a third commercial proposal which will be presented
and paid for by Selamix.

IIAA continues to dispute the allegations in the FATMA Notice and intends to continue to vigorously defend itself. Currently,
no demands or offers are outstanding.

Sao Paulo Groundwater Notice

In March 2014, IIAA, along with other nearby companies, received from the Sao Paulo District Attorney (the "District
Attorney") a notice and proposed Consent Agreement relating to alleged neighborhood-wide groundwater contamination at or
around its Sao Paulo manufacturing facility. The proposed Consent Agreement sought certain groundwater investigations and
other technical relief and proposed sanctions in the amount of R$3 million (the equivalent of approximately less than US$1
million at October 31, 2018). In November 2014, IIAA extended a settlement offer. The parties remained in discussions and
IIAA’s settlement offer was never accepted, rejected or countered by the District Attorney.

On August 31, 2016, the District Attorney filed civil actions against IIAA and other companies in the Central Forum of the
capital of the State of São Paulo seeking soil and groundwater investigation and remediation, together with monetary payment
in an unspecified amount. IIAA filed its defense to the civil action on January 26, 2017, alleging that IIAA has made all
necessary investigations and has taken remedial measures to address the contamination and that Companhia Ambiental do
Estado de São Paulo ("CETESB"), the environmental agency of São Paulo State, has agreed to the remedial measures taken by
IIAA. On June 20, 2017, IIAA presented a petition requesting a 90-day suspension of the lawsuit. IIAA has since held and is
currently engaged in discussions with the District Attorney regarding settlement of this matter. The District Attorney agreed to
an initial suspension on June 30, 2017 and a subsequent suspension for an additional 90 days which ended on July 9, 2018.

A new district attorney (the “New District Attorney”) assumed responsibility for the case in February 2018. The New District
Attorney would like the companies involved to try to reach a settlement agreement as to the remediation efforts to be taken after
having discussions and negotiations with the New District Attorney’s technical experts. IIAA attempted to schedule a meeting
with the New District Attorney’s technical experts. IIAA met with the New District Attorney on July 25, 2018. The New
District Attorney has indicated that he will request information related to the status of the current remediation needs from
CETESB. After receiving that information, the New District Attorney has indicated that he will schedule a meeting with IIAA
to discuss the proposed terms of a potential settlement agreement and granted a third suspension on August 14, 2018 which
ended on November 14, 2018.

There are no current demands or offers outstanding.

MaxxForce Engine EGR Warranty Litigation

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

From June 13-17, 2016, the court conducted a certification hearing in the N&C Action. On November 16, 2016, the court
certified a Canada-wide class comprised of persons who purchased heavy-duty trucks equipped with Advanced EGR

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Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

MaxxForce 11, MaxxForce 13, and MaxxForce 15 engines designed to meet 2010 EPA regulations. The court in the N&C
Action denied certification to persons who operated but did not buy the trucks in question. On November 2, 2017, NIC, NI,
Navistar Canada Inc. and Harbour International Trucks filed a notice of appeal. On December 8, 2017, the plaintiff filed a
notice of cross-appeal. Both the appeal and cross-appeal were heard by the British Columbia Court of Appeal on February 9,
2018. On August 1, 2018, the appellate court denied our appeal and granted, in part, N&C's cross-appeal and as such certified
three narrow issues on whether misrepresentations were made in Navistar's advertising materials. On September 28, 2018,
Navistar sought leave to appeal the certification decision to the Supreme Court of Canada and such leave is still pending. Aside
from that application, the next step will be an attendance before the case management judge regarding the details of the notice
of certification to be given to the class. No date for this attendance has been set.

On June 5, 2017, a hearing was held in the Quebec putative class action lawsuit captioned 4037308 Canada Inc. v. Navistar
Canada Inc., NI, and NIC. At that hearing, the court ruled on certain motions regarding evidence related to certification but
deferred a ruling on plaintiff’s proposed amendment to narrow the proposed class to Quebec-only purchasers and lessees of
model year 2010-13 vehicles containing MaxxForce 11, 13, and 15 liter engines. On November 23, 2017, we filed a motion to
stay the Quebec case until the British Columbia Court of Appeal rules on the certification order in the N&C Action. The stay
motion was filed on November 23, 2017 and was granted on December 7, 2017. The decision of the British Columbia Court of
Appeal was provided to the Quebec court. On September 6, 2018, the stay was extended until the Supreme Court of Canada
decides the application for leave to appeal in the N&C Action.

In the Manitoba putative class action lawsuit captioned Vern Brown v. Navistar International Corporation and Navistar Canada,
Inc., the court held a case management conference on June 29, 2018, after the plaintiff failed to file a complete certification
record by the previously court-ordered due date. The plaintiff advised that it expected to file its remaining certification
affidavits by August 31, 2018, and the court suspended certification scheduling in the interim. The plaintiff filed an additional
affidavit on July 5, 2018. On September 5, 2018, the court adjourned the certification application indefinitely to allow the
plaintiff to obtain an expert report. There are no certification or other hearings scheduled in any of the other Canadian Actions
at this time.

On July 7, 2014, Par 4 Transport, LLC filed a putative class action lawsuit against NI in the United States District Court for the
Northern District of Illinois (the "Par 4 Action"). Subsequently, seventeen additional putative class action lawsuits were filed in
various United States district courts, including the Northern District of Illinois, the Eastern District of Wisconsin, the Southern
District of Florida, the Middle District of Pennsylvania, the Southern District of Texas, the Western District of Kentucky, the
District of Minnesota, the Northern District of Alabama, and the District of New Jersey (together with the Par 4 Action, the
"U.S. Actions"). Some of the U.S. Actions name both NIC and NI, and allege matters substantially similar to the Canadian
Actions. More specifically, the Canadian Actions and the U.S. Actions (collectively, the "EGR Class Actions") seek to certify a
class of persons or entities in Canada or the United States who purchased and/or leased a ProStar or other Navistar vehicle
equipped with a model year 2008-2013 MaxxForce Advanced EGR engine.

In substance, the EGR Class Actions allege that the MaxxForce Advanced EGR engines are defective and that the Company
and NI failed to disclose and correct the alleged defect. The EGR Class Actions assert claims based on theories of contract,
breach of warranty, consumer fraud, unfair competition, misrepresentation and negligence. The EGR Class Actions seek relief
in the form of monetary damages, punitive damages, declaratory relief, interest, fees, and costs.

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

On December 17, 2014, Navistar's motion to consolidate the U.S. Actions and certain other non-class action lawsuits was
granted. The MDL Panel issued an order consolidating all of the U.S. Actions that were pending on the date of Navistar’s
motion before Judge Gottschall in the United States District Court for the Northern District of Illinois (the "MDL Action").

The MDL Panel also consolidated into the MDL Action certain non-class action MaxxForce Advanced EGR engine lawsuits
pending in the various federal district courts. Non-class federal lawsuits presenting pre-trial issues similar to the MDL Action
continue to be transferred to the MDL Action. Approximately 24 such actions are currently pending.

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

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Complaint (the “Amended Consolidated Complaint”). The Amended Consolidated Complaint added twenty-five additional
named plaintiffs. NI and NIC answered the Amended Consolidated Complaint on October 20, 2016.

On May 27, 2016, Judge Gottschall entered a Case Management Order setting a July 13, 2017 date for plaintiffs' class
certification motion. On November 30, 2016, the court entered an order referring discovery matters to a magistrate judge for
supervision. Pursuant to the magistrate’s order, the parties jointly filed a new proposed case management order on January 25,
2017, which extended the fact discovery deadline to November 22, 2017. On January 31, 2017, the parties filed a joint motion
with Judge Gottschall requesting adjustment of the class action briefing schedule to April 24, 2018. On February 2, 2017, Judge
Gottschall granted the parties' motion extending the deadline to complete the class certification briefing to April 24, 2018. On
February 6, 2017, the magistrate approved the parties' schedule set forth in the case management order jointly filed on January
25, 2017. In September 2017, the plaintiffs filed a motion to further extend the case deadlines. On October 5, 2017, Judge
Gottschall entered an Agreed Order Extending the Discovery Cutoff ordering that fact discovery relevant to class certification
be completed by March 13, 2018 and that the class certification briefing be completed by July 31, 2018. On March 5, 2018,
Judge Gottschall extended the fact discovery deadline to be completed by May 25, 2018 and ordered that the class certification
briefing be completed by October 22, 2018. Fact discovery relevant to class certification is now substantially complete. On
June 19, 2018, Judge Gottschall extended the deadline for completion of a class certification briefing to November 30, 2018.

On October 13, 2017, lead counsel for the plaintiffs filed a Motion for Leave to File a Second Amended Consolidated Class
Action Complaint, as well as a Motion for Voluntary Dismissal of Claims without Prejudice relating to 15 previously named
plaintiffs. On January 4, 2018, Judge Gottschall granted both motions. On January 9, 2018, the plaintiffs filed a Second
Amended Consolidated Class Action Complaint. The Second Amended Consolidated Class Action Complaint removed 15
named plaintiffs and substituted in eight new named plaintiffs. As a result, the total number of named plaintiffs is now 37 and
three class action cases were dismissed entirely without prejudice because there were no longer any remaining plaintiffs in
those cases. On August 16, 2018, Judge Gottschall entered a minute order setting a status hearing for September 26, 2018 in
light of the ongoing settlement efforts of the parties. During the September 26, 2018 status hearing, the parties advised the court
that additional settlement discussions were scheduled. Accordingly, on September 27, 2018 Judge Gottschall entered a minute
order extending class plaintiffs' deadline to file a motion for class certification and supporting expert reports until November 16,
2018 and setting the next status hearing for December 15, 2018. On November 13, 2018, Judge Gottschall entered a minute
order extending class plaintiffs’ deadline to file a motion for class certification and supporting experts to December 20, 2018.
On December 13, 2018, Judge Gottschall entered a minute order further extending the filing date for plaintiffs’ motion for class
certification and supporting expert materials to February 20, 2019. No other class briefing dates have been scheduled.

On November 11, 2017, seven plaintiffs (the “Direct Action Plaintiffs”) in the MDL moved for a separate trial and discovery
schedule independent of the class action schedule. On January 2, 2018, Judge Gottschall granted in part and denied in part the
Direct Action Plaintiffs’ motion, allowing two of the Direct Action Plaintiffs to begin limited discovery on plaintiff-specific
issues. The parties submitted competing proposed discovery schedules. In a minute order dated January 26, 2018, Judge
Gottschall declined to enter either schedule but ordered the parties to confer on a schedule for prioritizing the plaintiff-specific
discovery after the close of fact discovery relevant to class certification issues. The parties are currently engaged in discovery.
One of the Direct Action Plaintiffs filed a motion for leave to file a First Amended Complaint on September 25, 2018 and that
motion was granted by the court in a minute order dated December 13, 2018.

There are also non-class action MaxxForce Advanced EGR engine lawsuits filed against the Company in various state courts. A
number of non-class action lawsuits have been resolved in favor of the Company prior to or at trial or settled for immaterial
amounts. Approximately 40 state court non-class actions are pending at this time. One of the non-class action lawsuits
("Milan"), alleging violations of the Tennessee Consumer Protection Act and fraud and involving approximately 235 trucks,
was tried in Tennessee state court in August 2017. On August 10, 2017, the Milan jury returned a verdict of approximately $31
million against the Company, including $20 million in punitive damages. On October 2, 2017, the Company filed various
motions in the trial court challenging the verdict, including a Motion for Judgment Notwithstanding the Verdict or, in the
Alternative, a New Trial and Motion to Disapprove of the Award of Punitive Damages. The hearing on these motions was held
on December 1, 2017 and the court denied our motions, denied Milan’s motion for pre-judgment interest and granted Milan
$1.4 million in fees and costs. On January 11, 2018, the Company filed a Notice of Appeal in the Tennessee Court of Appeals
challenging the verdict. Briefing on the appeal is currently scheduled to be completed by March 18, 2019. In the third quarter of
2017, we recorded $31 million of charges in SG&A expenses in our Consolidated Statements of Operations.

111

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

EPA Clean Air Act Litigation

In February 2012, NI received a Notice of Violation ("NOV") from the United States Environmental Protection Agency (the
"EPA") pertaining to certain heavy-duty diesel engines which, according to the EPA, were not completely assembled by NI until
calendar year 2010 and, therefore, were not covered by NI's model year 2009 certificates of conformity. The NOV concluded
that NI's introduction into commerce of each of these engines violated the Federal Clean Air Act.

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

Discovery in the matter is proceeding in two phases. Fact discovery for the liability phase commenced on December 9, 2015.
Pursuant to the court's Minute Order entered on July 12, 2017, the Phase I liability fact discovery was completed as of
November 9, 2017.

On May 13, 2016, the DOJ, on behalf of the EPA, filed a motion for summary judgment on liability. On June 30, 2016, NIC and
NI opposed the EPA's motion for summary judgment, and NIC cross-moved for summary judgment against the EPA. On March
1, 2017, the court entered a Memorandum Opinion and Order (i) granting the DOJ’s motion for summary judgment on the issue
of liability with respect to NI, (ii) denying the DOJ’s motion for summary judgment on the issue of liability with respect to
NIC, and (iii) denying NIC’s motion for summary judgment.

On April 3, 2018, the parties jointly filed a stipulation of dismissal with prejudice for NIC only. The stipulation with prejudice
has no effect on the claims made against NI. With the dismissal of NIC, the matter moved to the remedy phase with respect to
NI. The court entered a scheduling order on May 3, 2018, setting a fact discovery deadline of May 22, 2019, expert report and
deposition deadlines through November 7, 2019, and a deadline for submission of dispositive motions of December 9, 2019.

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

American Intermodal Container Manufacturing

In 2014, NI began negotiating a contract manufacturing agreement (the “Manufacturing Agreement”) with American
Intermodal Container Manufacturing, Inc. and American Intermodal Container Manufacturing Co., LLC (together, “AICM”),
pursuant to which NI agreed to manufacture freight containers on AICM’s behalf for J.B. Hunt. Before the negotiations were
completed, the members of AICM’s board became involved in a dispute regarding the ownership and control of AICM which
resulted in a majority of the AICM board members acting to remove two of the other board members (the “Removed
Directors”).

NI and its subsidiary, International Truck and Engine Investments Corporation (“ITEIC”), subsequently entered into the
Manufacturing Agreement with AICM. On October 1, 2014, the Removed Directors filed a suit against AICM and its remaining
board members (together, the “AICM Defendants”) in the Supreme Court of New York in New York County, alleging that the
AICM Defendants had improperly (a) removed the Removed Directors and (b) taken control of AICM. The suit alleged: (i)
breach of contract (relating to the ownership and control of AICM); (ii) promissory estoppel; (iii) tortious interference with
contract; (iv) breach of fiduciary duty; (v) aiding and abetting breach of fiduciary duty; (vi) tortious interference with
prospective business relations; and (vii) declaratory judgment. The Removed Directors claimed damages of not less than $50
million.

On September 29, 2016, the Removed Directors filed a Motion for Leave to Amend Complaint to add NI, ITEIC and J.B. Hunt
as defendants, alleging that NI and ITEIC personnel allied and conspired with the AICM Defendants to (a) support the AICM
Defendants in breaching the ownership contract of the Removed Defendants, (b) remove the Removed Directors, and (c)
wrongfully interfere with certain AICM fundraising efforts. NI filed its opposition to this motion on November 9, 2016 and the
Removed Directors replied on November 18, 2016. On February 7, 2018, the court issued an order granting the Removed
Directors’ Motion for Leave to Amend Complaint to add claims against NI, ITEIC and J.B. Hunt for (i) tortious interference
with contract and (ii) aiding and abetting breach of fiduciary duty.

112

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The court denied the Removed Directors’ request to add a claim for tortious interference with prospective business relations
against NI, ITEIC and J.B. Hunt. The Removed Directors claim damages against NI, ITEIC and J.B. Hunt of not less than $50
million.

On February 27, 2018, the Removed Directors filed an amended complaint (the “Amended Complaint”) in conformance with
the court’s February 7, 2018 order. On April 30, 2018, NI and ITEIC filed an answer to the Amended Complaint denying
liability and asserting affirmative defenses and counterclaims, including counterclaims against AICM for indemnification and
breach of contract (seeking to recover amounts due to NI) under the Manufacturing Agreement. NI and ITEIC have vigorously
defended their position that they are not liable for the claims asserted by the Removed Directors.

On November 20, 2018, NI, ITEIC and the Removed Directors agreed to settle this suit without any payment by NI, ITEIC or
the Removed Directors. NI, ITEIC and the Removed Directors entered a settlement agreement on or about December 12, 2018.
The Removed Directors have agreed to file a stipulation of discontinuance with prejudice with respect to their claims against NI
and ITEIC.

Brazil Truck Dealer Disputes

In January 2014, IIAA initiated an arbitration proceeding under the International Chamber of Commerce rules seeking payment
for goods sold and unpaid, in the amount of R$64 million (approximately US$17 million as of October 31, 2018), including
penalties and interest, from a group of affiliated truck dealers in Brazil. The truck dealers are affiliated with each other, but not
with us, and are collectively referred to as Navitrucks. In the proceeding, IIAA also seeks a declaration of fault against
Navitrucks related to the termination of the truck dealer agreements between IIAA and Navitrucks. Navitrucks responded in
part by submitting counterclaims against IIAA seeking the amount of R$128 million (approximately US$34 million as of
October 31, 2018) for damages related to alleged unfulfilled promises and injury to Navitrucks’ reputation. In October 2014,
Navitrucks amended their counterclaims by increasing the amount of damages. During a preliminary hearing before the arbitral
tribunal on March 24, 2015, the parties agreed to submit all of the pending claims between the parties to the exclusive
jurisdiction of the arbitral tribunal. Pursuant to the timetable issued in the arbitration proceeding, IIAA presented its complaint
in July 2015, Navitrucks filed its answer and counterclaims on August 24, 2015, and IIAA filed its rebuttal and answer to
Navitrucks’ counterclaims on October 22, 2015. On December 7, 2015, Navitrucks filed its rebuttal to IIAA’s answer to
counterclaims. On June 13-15, 2016, the arbitral tribunal held hearings on the parties presenting witnesses and evidence.

On July 18, 2016, IIAA and Navitrucks presented additional documents and information related to the hearing held on June
13-15, 2016. On September 30, 2016, the parties presented their final allegations. On April 20, 2017, the arbitral tribunal issued
a partial award (the "Initial Award") granting a portion of the relief sought by each of the parties. Specifically, the arbitral
tribunal's Initial Award held that: (a) Navitrucks failed to pay certain amounts to IIAA for the purchase of vehicles under its
agreements with IIAA, thereby breaching its contractual obligations; and (b) IIAA breached its contractual obligations under its
agreements with Navitrucks due to its failure to fulfill its promises to invest in products, infrastructure, and a dealership
network. Furthermore, the arbitral tribunal held that, due to the mutual breach of the agreements between IIAA and Navitrucks,
the agreements should be deemed terminated.

On June 3, 2017, IIAA and Navitrucks filed an application to clarify certain interpretations of the Initial Award and to correct
clerical errors in the Initial Award. IIAA also requested an award to (a) set the indisputable amount of the Initial Award, and (2)
order Navitrucks to promptly pay such amount. On June 8, 2017, the arbitral tribunal invited IIAA and Navitrucks to present
their respective comments on each other’s applications on or before June 27, 2017. On June 3, 2017 and June 27, 2017, IIAA
and Navitrucks, respectively, filed their comments. On September 29, 2017, the arbitral tribunal issued a decision on the
applications filed by both parties in which it rejected all of the requests made in the applications of both parties. On October 31,
2017, the arbitral tribunal issued a decision relating to the timeline for the production of technical evidence to be used in the
calculation phase in which the actual monetary amount of the damages owed by each party to the other will be definitively
determined.

As determined by the arbitral tribunal, IIAA (a) designated its expert assistant and disclosed the questions to be answered by the
arbitral expert (official expert designated by the arbitral tribunal); (b) presented a summary of the amount that Navitrucks owes
to IIAA in accordance with the previous calculation and related award issued on April 20, 2017; and (c) presented its replies to
the Navitrucks' petitions.

On May 11, 2018, the arbitral tribunal issued a decision allowing the calculation to be made by the parties’ experts and
scheduled the calculation phase hearing for August 16, 2018. On July 6, 2018, each party’s experts presented their reports
indicating the calculation of the total amount due from each party to the other party. On August 6, 2018, the parties jointly filed
a petition informing the arbitral tribunal that they reached an agreement as to the total amount due from each party to the other

113

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

party. Pursuant to the agreement, Navitrucks agreed that it owes IIAA the total amount of R$107 million (approximately US
$29 million as of October 31, 2018) after deducting the agreed amount of Navitrucks' claim against IIAA.

In addition, the parties requested: (a) the cancellation of the hearing scheduled for August 16, 2018; (b) a 15 day period for the
parties to present their respective costs incurred in connection with the arbitral proceeding; and (c) the closure of the calculation
phase with the final ruling of merits.

On August 13, 2018, the arbitral tribunal issued a decision canceling the hearing scheduled for August 16, 2018 and directed the
parties to prove their respective incurred costs in connection with the arbitral proceeding and to specify whether there were any
additional productions of evidence or considerations by August 23, 2018.

On August 23, 2018, IIAA filed a petition indicating that its costs incurred in connection with the arbitral proceeding were R$6
million (approximately US$2 million as of October 31, 2018). On the same date, Navitrucks filed a petition indicating that its
costs incurred in connection with the arbitral proceeding were R$3 million (approximately less than US$1 million as of October
31, 2018). On September 18, 2018, the arbitral tribunal issued a decision (i) declaring the end of the evidence phase, (ii)
ordering the parties to present their closing arguments on or before October 31, 2018, and (iii) stating that the final decision on
the merits will be issued on or before December 20, 2018.

We have recorded no receivable related to this matter in our Consolidated Financial Statements.

In addition, another truck dealer and two truck fleet owners in Brazil have separate adversarial proceedings pending against
IIAA that may have similar legal and factual issues as the Navitrucks claim. These other claims are not material either
individually or in the aggregate.

Other

U.S. Department of Defense Matter

In the third quarter of 2016, Navistar Defense, LLC ("ND") received a subpoena from the United States Department of Defense
Inspector General (the "DOD IG"). The subpoena requested documents relating to ND's sale of its independent suspension
systems ("ISS") for military vehicles to the government for the period from January 1, 2009 through December 31, 2010. On
June 3, 2016, ND met with government representatives, including representatives from the DOD IG and the DOJ, to discuss the
matter.

Since then, ND has been in ongoing discussions with the DOD IG and the DOJ. ND made submissions of documents
responsive to the subpoena in June and August 2016 and has completed its subpoena response. On May 1, 2017, ND met with
government representatives, including representatives from the DOD IG and the DOJ, to further discuss the matter, including
assertions that ND may have overcharged the United States for the ISS components. ND agreed to provide additional
information relating to the pricing of the ISS components. The parties met again on June 13, 2017. In August 2017, ND
received a letter from the DOJ claiming that ND made false and misleading statements during the course of price negotiations
and during the Defense Contract Audit Agency audit which resulted in ND overcharging the United States for the ISS
components by approximately $88 million and asking for treble damages and penalties for a total demand of approximately
$264 million. ND has responded to the DOJ’s demand letter explaining its position that it has no liability in this matter and
outlining the bases for such position, and that ND intends to vigorously defend its position. ND and the DOJ communicated
between October 5, 2017 and December 8, 2017 to discuss their respective positions on both liability and damages. The parties
have engaged in discussions related to mediation, but there is currently no written agreement or schedule for mediation.

On December 8, 2017, ND received another subpoena from the DOD IG which requested documents relating to ND's pricing of
the Mine Resistant Ambush Protected (“MRAP”) vehicle and its sale of parts to the government for the period from January 1,
2006 through December 31, 2013. ND responded to the subpoena and made four productions of responsive documents.

On July 10, 2018, ND received another subpoena from the DOD IG requesting additional custodian emails and documents
related to the MRAP and ISS components. ND is responding to the subpoena and has made several productions of responsive
documents. Additionally, in September and October 2018 the DOJ conducted interviews of certain current and/or former
employees and may conduct additional interviews in the future.

At this time, we are unable to predict the outcome of these matters, including whether a settlement will be reached, or provide
meaningful quantification of how the final resolution of this matter may impact our future consolidated financial condition,
results of operations or cash flows.

114

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Deepwater Horizon Settlement Program

On June 3, 2018, we concluded the settlement of a business economic loss claim relating to our Alabama engine manufacturing
facility. We will receive a gross amount of $85 million with a net present value of $70 million, net of our fees and costs, from
the Deepwater Horizon Settlement Program. The cash proceeds will be received in installments in 2019 and 2020. The net
present value of the settlement was recorded in our third quarter 2018 financial results in Other Income, net in our Consolidated
Statements of Operations, and Other current and Other non-current assets in our Consolidated Balance Sheets.

14. Segment Reporting

The following is a description of our four reporting segments:

• Our Truck segment manufactures and distributes Class 4 through 8 trucks, buses, military and government vehicles
under the International and IC Bus ("IC") brands, and produces engines under our proprietary brand name and parts
required to support the military truck lines. This segment sells its products in the U.S., Canada, and Mexico markets, as
well as through our export truck business. In an effort to strengthen and maintain our dealer network, this segment
occasionally acquires and operates dealer locations for the purpose of transitioning ownership.

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

• Our Global Operations segment primarily consists of Brazil engine operations which produce diesel engines under

contract manufacturing arrangements, as well as under the MWM brand, for sale to OEMs in South America. In addition,
our Global Operations segment includes the operating results of our joint venture in China with Anhui Jianghuai
Automobile Co ("JAC").

• Our Financial Services segment provides retail, wholesale, and lease financing of products sold by the Truck and Parts

segments and their dealers within the U.S. and Mexico, as well as financing for wholesale accounts and selected retail
accounts receivable. This segment also facilitates financing relationships in other countries to support our Manufacturing
Operations.

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

Segment Profit (Loss)

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

• The costs of profit sharing and annual incentive compensation for the Manufacturing operations are included in corporate

expenses.

•

Interest expense and interest income for the Manufacturing operations are reported in corporate expenses.

• The Financial Services segment finances certain sales to our dealers in North America, which include an interest-free
period that varies in length that is subsidized by our Truck and Parts segments. Additionally, the Financial Services
segment reports intersegment revenues from secured and unsecured loans to the Manufacturing operations. Certain retail
sales financed by the Financial Services segment, primarily NFC, require the Manufacturing operations, primarily the
Truck segment, to share a portion of any credit losses.

• We allocate "access fees" to the Parts segment from the Truck segment for certain engineering and product development
costs, depreciation expense, and SG&A expenses incurred by the Truck segment based on the relative percentage of
certain sales, as adjusted for cyclicality.

• Other than the items discussed above, the selected financial information presented below is presented in accordance with

our policies described in Note 1, Summary of Significant Accounting Policies.

115

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The following tables present selected financial information for our reporting segments:

(in millions)
Year Ended October 31, 2018

Truck

Parts

Global
Operations

Financial
Services(A)

Corporate
and
Eliminations

Total

External sales and revenues, net .............................. $ 7,386
104
Intersegment sales and revenues..............................
Total sales and revenues, net ............................ $ 7,490

$ 2,399

$ 2,407

Income (loss) from continuing operations
attributable to NIC, net of tax .................................. $
Income tax expense..................................................

Segment profit (loss)......................................... $
Depreciation and amortization................................. $
Interest expense........................................................
Equity in income (loss) of non-consolidated
affiliates....................................................................
Capital expenditures(B) .............................................

397

—

397

130

—

2
99

569

—

569

—

3
2

305

360

—

(5)
3

160

257

—

—
1

— $ 10,250

(264)
—
(264) $ 10,250

(716) $
(52)
(664) $
$
10

235

—
8

340
(52)
392

211

327

—
113

(in millions)
Year Ended October 31, 2017

Truck

Parts

Global
Operations

Financial
Services(A)

Corporate
and
Eliminations

Total

External sales and revenues, net .............................. $ 5,770
39
Intersegment sales and revenues..............................
Total sales and revenues, net ............................ $ 5,809

$ 2,369

$ 2,392

Income (loss) from continuing operations
attributable to NIC, net of tax .................................. $
Income tax expense..................................................

(6) $
—
(6) $
$

137

—

4
82

616

—

616

—

3
2

279

309

142

235

(7) $
—
(7) $
$
13

—

(1)
5

—

—
1

$ 8,570

10
(185)
—
(175) $ 8,570

(651) $
(10)
(641) $
$
11

265

—
12

29
(10)
39

223

351

6
102

116

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(in millions)
Year Ended October 31, 2016

Truck

Parts

Global
Operations

Financial
Services(A)

Corporate
and
Eliminations

Total

External sales and revenues, net.................................. $ 5,271
132
Intersegment sales and revenues .................................
Total sales and revenues, net ................................ $ 5,403

$ 2,398

$ 2,427

Income (loss) from continuing operations
attributable to NIC, net of tax...................................... $
Income tax expense .....................................................

Segment profit (loss) ............................................ $
Depreciation and amortization .................................... $
Interest expense ...........................................................
Equity in income (loss) of non-consolidated affiliates
Capital expenditures(B).................................................

(189) $
—
(189) $
$
129

—

5
97

640

—

640

—

4
2

296

341

(21) $
—
(21) $
$
18

—
(3)
4

135

100

235

100

—

100

—
2

$ 8,110

10
(305)
1
(295) $ 8,111

(627) $
(33)
(594) $
$
15

247

—
11

(97)
(33)
(64)
225

327

6
116

(in millions)
Segment assets, as of:

Truck

Parts

Global
Operations

Financial
Services

Corporate
and
Eliminations

Total

October 31, 2018..................................................... $ 2,085
1,621
October 31, 2017......................................................

636

632

331

378

$ 2,648

1,530

$ 7,230

2,207

1,297

6,135

_________________________
(A) Total sales and revenues in the Financial Services segment include interest revenues of $182 million, $165 million, and $167 million for the years ended

October 31, 2018, 2017, and 2016, respectively.

(B) Exclusive of purchases of equipment leased to others and liabilities related to capital expenditures.

No single customer accounted for more than 10% of consolidated sales and revenues for the years ended October 31, 2018,
2017 and 2016.

Sales and revenues to external customers classified by significant products and services were as follows:

(in millions)
Sales and revenues:

For the Years Ended October 31,

2018

2017

2016

Trucks......................................................................................................................... $
Parts............................................................................................................................
Engine.........................................................................................................................
Financial Services ......................................................................................................

7,323
2,215
552
160

5,706
2,177
545
142

5,176
2,216
583
136

117

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Information concerning principal geographic areas is presented as follows:

(in millions)
Sales and revenues:(A)

For the Years Ended October 31,

2018

2017

2016

United States .............................................................................................................. $
Canada ........................................................................................................................
Mexico........................................................................................................................
Brazil ..........................................................................................................................
Other...........................................................................................................................

7,223
868
933
263
963

6,375
708
708
237
542

6,227
604
575
240
465

(in millions)
Long-lived assets:(B)

As of October 31,

2018

2017

United States .................................................................................................................................... $
Canada..............................................................................................................................................
Mexico .............................................................................................................................................
Brazil................................................................................................................................................
Other ................................................................................................................................................

1,099
9
249
73
8

1,068
11
226
90
9

__________________________
(A) During 2018, we identified certain sales included in Other which should have been classified as United States. As a result, for the years ended October 31,

2017 and 2016, we have reclassified $31 million and $41 million of sales, respectively. These reclassifications did not impact our Consolidated
Statements of Operations or our segment sales and revenues.

(B) Long-lived assets consist of Property and equipment, net, Goodwill, and Intangible assets, net.

15. Stockholders' Deficit

Preferred and Preference Stocks

NIC has authorized 30 million shares of preferred stock, none of which have been issued, with a par value of $1.00 per share.
NIC has authorized 10 million shares of preference stock with a par value of $1.00 per share. Currently, Series B
Nonconvertible Junior Preference Stock ("Series B") and Series D Convertible Junior Preference Stock ("Series D") are
outstanding.

The UAW holds the Series B and is currently entitled to elect one member of our Board of Directors. As of October 31, 2018
and 2017, there was one share of Series B Preference stock with a par value of $1.00 per share authorized and outstanding.

At both October 31, 2018 and 2017, there were 70,182 shares of Series D issued and outstanding. These shares were issued
with a par value of $1.00 per share, an optional redemption price, and a liquidation preference of $25 per share plus accrued
dividends. The Series D stock may be converted into NIC common stock at the holder's option (subject to adjustment in certain
circumstances); upon conversion each share of Series D stock is converted to 0.3125 shares of common stock. The Series D
stock ranks senior to common stock as to dividends and liquidation and receives dividends at a rate of 120% of the cash
dividends on common stock as declared on an as-converted basis.

118

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Common Stock

Changes in shares of common stock and treasury stock were as follows:

(in millions)
Balance as of October 31, 2015.........................................................................................
Shares issued.................................................................................................................
Shares acquired.............................................................................................................
Balance as of October 31, 2016.........................................................................................
Shares issued.................................................................................................................
Shares acquired.............................................................................................................
Balance as of October 31, 2017.........................................................................................
Shares issued.................................................................................................................
Shares acquired.............................................................................................................
Balance as of October 31, 2018.........................................................................................

Common
Stock

Treasury
Stock

86.8

—

86.8

16.3

—

103.1

—

—
103.1

5.3
(0.1)
—

5.2
(0.7)
0.1

4.6
(0.5)
0.1
4.2

Shares
Outstanding
81.5

0.1

—

81.6

17.0
(0.1)
98.5

0.5
(0.1)
98.9

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

Additional Paid in Capital

In accounting for the issuance of the 2018 Convertible Notes, a debt component and an equity component were separated
resulting in the debt component being recorded at its estimated fair value without consideration given to the conversion feature.
We estimated the fair value of the liability component at $177 million. The resulting equity component of $22 million, net of $1
million of discount, was recorded in Additional paid in capital. Issuance costs were also allocated between the debt and equity
components resulting in an immaterial amount being recorded as a reduction in Additional paid in capital. The 2018
Convertible Notes were fully repaid upon maturity in October 2018, and none were converted into our common stock.

In accounting for the issuance of the 2019 Convertible Notes, the debt component and equity component were separated,
resulting in the debt component being recorded at its estimated fair value without consideration given to the conversion feature.
We estimated the fair value of the liability component at $367 million. The resulting equity component of $44 million was
recorded in Additional paid in capital and will not be remeasured as long as it continues to meet the conditions for equity
classification. Issuance costs were also allocated between debt and equity components with $1 million being recorded as a
reduction in Additional paid in capital.

For more information on our 2018 Convertible Notes and 2019 Convertible Notes, see Note 9, Debt.

Accumulated Other Comprehensive Loss

The following table presents changes in Accumulated other comprehensive loss, net of tax, included in our Consolidated
Statements of Shareholders' Deficit:

(in millions)
Balance as of October 31, 2017 ................................................................... $
Other comprehensive income (loss) before reclassifications..................
Amounts reclassified out of accumulated other comprehensive loss......
Net current-period other comprehensive income (loss)...................

Balance as of October 31, 2018 ................................................................... $

119

Unrealized
Gain on
Marketable
Securities

Foreign
Currency
Translation
Adjustments

Defined
Benefit
Plans

— $

—

—
— $

(283) $
(32)
—
(32)
(315) $

(1,928) $
201

122

323
(1,605) $

Total
(2,211)
169

122

291
(1,920)

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(in millions)
Balance as of October 31, 2016 ................................................................... $
Other comprehensive income (loss) before reclassifications(A) ..............
Amounts reclassified out of accumulated other comprehensive loss......
Net current-period other comprehensive income (loss)...................

Balance as of October 31, 2017 ................................................................... $

1
(1)
—
(1)
— $

Unrealized
Gain on
Marketable
Securities

Foreign
Currency
Translation
Adjustments
$

Defined
Benefit
Plans

(2,361) $
279

154

433
(1,928) $

Total
(2,640)
275

154

429
(2,211)

(280) $
(3)
—
(3)
(283) $

(A) Other comprehensive income before reclassifications for Defined Benefit Plans includes a $28 million intraperiod tax allocation and $8 million of

deferred tax assets.

(in millions)
Balance as of October 31, 2015 ................................................................... $
Other comprehensive income (loss) before reclassifications ..................
Amounts reclassified out of accumulated other comprehensive loss......
Net current-period other comprehensive income (loss) ...................

Balance as of October 31, 2016 ................................................................... $

Unrealized
Gain on
Marketable
Securities
1

Foreign
Currency
Translation
Adjustments
$

(287) $
7

—

7
(280) $

Defined
Benefit
Plans

(2,315) $
(177)
131
(46)
(2,361) $

Total
(2,601)
(170)
131
(39)
(2,640)

—

—
1

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

Location in Consolidated
Statements of Operations

For the Years Ended October 31,

2018

2017

2016

Defined benefit plans

Amortization of prior service benefit.... Selling, general and administrative expenses .....
Amortization of actuarial loss ............... Selling, general and administrative expenses .....
Settlements ............................................ Selling, general and administrative expenses .....
Settlements ............................................ Restructuring .......................................................
Total before tax .................................................
Income tax expense .............................................
Total reclassifications for the period, net of tax ............................................................................

$ — $ — $

114

—

123
(1)
122

138

—

161
(7)
154

(1)
133

—

132
(1)
131

Dividend Restrictions

Under the General Corporation Law of the State of Delaware, dividends may only be paid out of surplus or out of net profits for
the year in which the dividend is declared or the preceding year, and no dividend may be paid on common stock at any time
during which the capital of outstanding preferred stock or preference stock exceeds our net assets.

Certain debt instruments, including our 6.625% Senior Notes indenture, our Loan Agreement with regard to the Tax Exempt
Bonds and our Amended Term Loan Credit Agreement, contain terms that include various negative covenants and restrictions,
including, among others, certain limitations on dividends. We have not paid dividends on our common stock since 1980.

16. Earnings (Loss) Per Share Attributable to Navistar International Corporation

The following table presents the information used in the calculation of our basic and diluted earnings (loss) per share for
continuing operations, discontinued operations, and net income (loss), all attributable to NIC in our Consolidated Statements of
Operations:

120

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(in millions, except per share data)
Numerator:

For the Years Ended October 31,

2018

2017

2016

Amounts attributable to Navistar International Corporation common stockholders:

Income (loss) from continuing operations, net of tax ........................................................
Income from discontinued operations, net of tax...............................................................
Net income (loss) ........................................................................................................

340

—

340

(97)
—
(97)

Denominator:

Weighted average shares outstanding:

Basic ...................................................................................................................................
Effect of dilutive securities.................................................................................................
Diluted.........................................................................................................................

Earnings (loss) per share attributable to Navistar International Corporation:

Basic:

Continuing operations ........................................................................................................
Discontinued operations.....................................................................................................
Net income (loss) ........................................................................................................

Diluted:

98.9

0.7

99.6

3.44

—

3.44

3.41

—

3.41

93.0

0.5

93.5

0.31

0.01

0.32

0.31

0.01

0.32

81.7

—

81.7

$ (1.19)
—
$ (1.19)

The conversion rate on our 4.5% Senior Subordinated Convertible Notes due 2018 (the "2018 Convertible Notes") was 17.1233
shares of common stock per $1,000 principal amount of 2018 Convertible Notes, equivalent to an initial conversion price of
approximately $58.40 per share of common stock. The 2018 Convertible Notes had an anti-dilutive effect when calculating
diluted earnings per share as our average stock price was less than $58.40 for all periods presented. The 2018 Convertible Notes
were fully repaid upon maturity in October 2018, and none were converted into our common stock.

The conversion rate on our 4.75% Senior Subordinated Convertible Notes due 2019 (the "2019 Convertible Notes") is 18.4946
shares of common stock per $1,000 principal amount of 2019 Convertible Notes, equivalent to an initial conversion price of
approximately $54.07 per share of common stock. The 2019 Convertible Notes have an anti-dilutive effect when calculating
diluted earnings per share when our average stock price is less than $54.07.

For more information on our 2018 Convertible Notes and 2019 Convertible Notes, see Note 9, Debt.

In February 2017, we consummated our previously announced strategic alliance with TRATON Group, which included an
equity investment in the Company by TRATON Group pursuant to a Stock Purchase Agreement (the "Stock Purchase
Agreement"), a License and Supply Framework Agreement and a Procurement JV Framework Agreement.

Pursuant to the Stock Purchase Agreement, on February 28, 2017 we issued and TRATON Group purchased 16.2 million shares
of our common stock for an aggregate purchase price of $256 million at $15.76 per share (a 19.9% stake at the time of purchase
(16.6% on a fully-diluted basis)) in the Company, excluding stock issuance costs.

The computation of diluted earnings per share also excludes outstanding options and other common stock equivalents in periods
where inclusion of such potential common stock instruments would be anti-dilutive.

For the year ended October 31, 2016, no dilutive securities were included in the computation of diluted earnings per share
because they would have been anti-dilutive due to the net loss attributable to NIC. Additionally, certain securities have been
excluded from the computation of earnings per share, as our average stock price was less than their respective exercise prices.
For the years ended October 31, 2018, 2017, and 2016, the aggregate shares not included were 9.8 million, 13.9 million, and
15.0 million, respectively.

121

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the year ended October 31, 2018, the aggregate shares not included in the computation of earnings per share were primarily
comprised of 7.6 million shares related to the 2019 Convertible Notes. For the years ended October 31, 2017 and 2016, the
aggregate shares not included in the computation of earnings per share were primarily comprised of 3.4 million shares related to
the 2018 Convertible Notes and 7.6 million shares related to the 2019 Convertible Notes.

17. Stock-based Compensation Plans

2013 Performance Incentive Plan

The 2013 Performance Incentive Plan ("2013 PIP") was approved by the Board of Directors on December 11, 2012 and
subsequently approved by the stockholders on February 19, 2013. The plan was amended on February 11, 2015. The 2013 PIP
provides for the grant of annual cash incentive awards to all employees (including the Company’s executive officers), and stock
options, restricted stock or stock unit awards, stock appreciation rights and other stock-based awards to all employees
(including the Company’s executive officers), any consultants of the Company and its subsidiaries, and all non-employee
directors serving on the Company’s Board of Directors. The awards granted under the 2013 PIP are established by our Board of
Directors or a committee thereof at the time of issuance.

The 2013 PIP replaced on a prospective basis, our 2004 Performance Incentive Plan, and will expire in February 2023. A total
of 3,665,500 shares of common stock were reserved for awards under the 2013 Plan. The number of shares authorized and
available for issuance under the 2013 PIP will be increased by shares of stock subject to an option or award under the 2013 PIP,
the Company’s 2004 Performance Incentive Plan, or the Ownership Program as further described below, (collectively, the
"Existing Plans"), that is canceled, expired, forfeited, settled in cash, or otherwise terminated after February 19, 2013 without a
delivery of shares to the participant of such plan, including shares used to satisfy the exercise price of a stock option or a tax
withholding obligation arising in connection with an award. As of October 31, 2018, 3,142,917 shares remain available for
issuance under the 2013 PIP. Shares issued under the Plan may be newly issued shares or reissued Treasury shares.

Other Plans and Grants

The following plans were approved by our Board of Directors but were not approved and were not required to be approved by
our stockholders: the Executive Stock Ownership Program, as amended from time to time (the "Ownership Program"), and the
Non-Employee Directors Deferred Fee Plan (the "Deferred Fee Plan").

• Ownership Program—In June 1997, our Board of Directors approved the terms of the Ownership Program. In general,
under the Ownership Program in existence through November 2013, all officers and senior managers were required to
acquire, by direct purchase or through salary or annual bonus reduction, an ownership interest in the Company by
acquiring a designated amount of our common stock based on organizational level. Participants were required to hold
such stock for the entire period in which they are employed by the Company. The Ownership Program was amended and
restated effective November 1, 2013 on a going forward basis. The new guidelines (i) increased stock ownership guideline
multiples to six times salary for the President and CEO and up to three times salary for other senior executives; (ii)
modified retention requirements for Company granted equity until ownership requirements are met; (iii) added a holding
period for shares acquired through transactions with Company granted equity after the executives satisfy the stock
ownership requirement; (iv) eliminated the granting of premium shares as an inducement to executives fulfilling stock
ownership guidelines on an accelerated basis; and (v) eliminated the required time frame to fulfill stock ownership
guidelines. Under the prior Ownership Program, participants were entitled to defer their cash bonus into deferred share
units ("DSUs"), which vested immediately. There were 2,365 DSUs outstanding as of October 31, 2018. Premium share
units ("PSUs") were also eligible to be awarded to participants who complete their ownership requirement on an
accelerated basis. PSUs vested annually, pro rata over three years. There were 29,712 PSUs outstanding as of October 31,
2018 under the prior Ownership Program. Each vested DSU and PSU will be settled by delivery of one share of common
stock within ten days after a participant's termination of employment or at such later date as required by IRC Section
Rule 409A. PSUs and DSUs awarded between February 19, 2013 and October 31, 2013 were issued under the 2013 PIP.

• Deferred Fee Plan—Under the Deferred Fee Plan, non-employee directors may elect to defer payment of all or a portion
of their retainer fees and meeting fees in cash (with interest) or in stock units. Deferrals in the deferred stock account are
valued as if each deferral was vested in NIC common stock as of the deferral date. As of October 31, 2018, 19,491
deferred shares were outstanding under the Deferred Fee Plan. Beginning on September 30, 2013, shares deferred by
non-employee directors have been issued out of the 2013 PIP. The Deferred Fee Plan was amended and restated effective
February 11, 2015 on a going forward basis.

122

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Stock Options

Stock options represent the right to purchase a specified number of shares of common stock at a specified exercise price.
Generally, stock options are awarded with an exercise price equal to the fair market value of the common stock at grant date.
The stock options granted prior to December 2009 generally have a ten-year contractual life. Stock options granted in
December 2009 through November 2016 were granted with a seven-year contractual life. Since December 2016, stock options
have been granted with a ten-year contractual life. Stock options are valued using the Black-Scholes option pricing model and
vest ratably over a three-year period.

The following table summarizes stock options activity:

For the Years Ended October 31,

2018

2017

2016

Weighted
Average
Exercise
Price

(in thousands)

Weighted
Average
Exercise
Price

(in thousands)

Weighted
Average
Exercise
Price

Options outstanding, at beginning of year ....
Granted...................................................
Exercised................................................
Forfeited/expired....................................
Options outstanding, at end of year ..............
Options exercisable, at end of year ...............

2,408

236

(236)

(628)

1,780

1,396

38.81

40.44

32.78

56.64

28.98

33.55

2,835

301
(325)
(403)
2,408

2,073

38.89

27.88

30.25

38.13

38.81

40.72

2,886

39.33

—
(86)
2,835

2,695

10.6

—

42.30

38.89

39.29

The following table summarizes information about stock options outstanding:

Range of Exercise Prices:

(in thousands)

(in years)

$ 10.60 - $ 31.19.............................................................
$ 31.20 - $ 39.32.............................................................
$ 39.33 - $ 68.65.............................................................
Options Outstanding..............................................................

813

684

283

1,780

The following table summarizes information about stock options exercisable:

Weighted Average
Remaining
Contractual Life

Weighted
Average
Exercise Price

Aggregate
Intrinsic Value

(in millions)

3.7

0.9

7.3

28.19

37.02

41.52

4.3

—

Weighted Average
Remaining
Contractual Life

Weighted
Average
Exercise Price

Aggregate
Intrinsic Value

(in millions)

2.5

0.8

2.4

28.52

37.05

43.86

3.2

—

Range of Exercise Prices:

(in thousands)

(in years)

$ 10.60 - $ 31.19.............................................................
$ 31.20 - $ 39.32.............................................................
$ 39.33 - $ 68.65.............................................................
Options Exercisable...............................................................

637

678

1,396

123

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The weighted average grant date fair value of options granted during the years ended October 31, 2018, 2017, and 2016 was
$18.90, $13.61, and $5.15, respectively. The total intrinsic value of stock options exercised during the years ended October 31,
2018, 2017, and 2016 was $2.5 million, $2.6 million, and zero, respectively. The fair value of each option grant was estimated
on the grant date using the Black-Scholes option-pricing model.

The following table summarizes the annual weighted average assumptions:

For the Years Ended October 31,

2018

2017

2016

Risk-free interest rate ........................................................................................................
Expected volatility ............................................................................................................
Expected life (in years) .....................................................................................................

2.5%

49.1%

5.3

1.9%

55.2%

5.0

1.7%

56.8%

4.8

The use of the Black-Scholes option-pricing model requires us to make certain estimates and assumptions. The risk-free interest
rate utilized is the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term
assumption on the grant date, rounded to the nearest half year. A dividend yield assumption of 0% is used for all grants based on
our history of not paying a dividend to any class of stock and future expectations. Expected volatility is based on a blend of our
historical stock prices and implied volatilities from traded options in our stock. The weighted average expected life in years for
all grants as a group is then calculated for each year.

Restricted Stock

Restricted stock represents common stock issued subject to forfeiture or other restrictions that will lapse upon satisfaction of
specified conditions. Restricted stock is valued based on the fair value of the common stock at grant date and except for the
restricted stock issued to non-employee directors, vests either ratably over a three-year period or cliff-vest at the end of a three-
year period. Restricted stock issued to non-employee directors represent their first quarterly retainer fees and immediately vest
at grant date.

The following table summarizes restricted stock activity:

For the Years Ended October 31,

2018

2017

2016

(in thousands)

Weighted
Average Grant
Date Fair Value

(in thousands)

Weighted
Average Grant
Date Fair Value

(in thousands)

Weighted
Average Grant
Date Fair Value

Nonvested, at beginning of year .......
Granted ......................................
Vested ........................................
Nonvested, at end of year .................

— $

(4)
—

—

34.97

34.97
—

— $

5
(5)
—

—

24.62

24.62
—

— $

5
(5)
—

—

12.52

12.52
—

The aggregate grant date fair value of restricted stock vested for the years ended October 31, 2018, 2017 and 2016 was $0.1
million.

Restricted Stock Units

Restricted stock units ("RSUs") represent the right to receive shares of common stock ("share-settled RSUs") or the cash
("cash-settled RSUs") value of one share of common stock in the future, with the right to future delivery of the shares or cash
subject to forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Share and cash-settled RSUs
are valued based on the fair value of the common stock at grant date and vest either ratably over a three-year period or cliff-vest
at the end of a three-year period. Cash-settled RSUs are classified as liabilities and are remeasured at each reporting date until
settlement.

124

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The following tables summarize RSUs activity for the years ended October 31:

2018

Weighted
Average Grant
Date Fair Value

(in thousands)

Share-Settled RSUs

2017

(in thousands)

Weighted
Average Grant
Date Fair Value

(in thousands)

2016

Weighted
Average Grant
Date Fair Value

Nonvested, at beginning of year.....
Granted....................................
Vested......................................
Forfeited ..................................
Nonvested, at end of year ...............

619

168

(214)

(71)

502

15.04

40.05

9.59

20.24

25.01

2018

Weighted
Average Grant
Date Fair Value

(in thousands)

613

210
(204)
—

619

8.74

27.28

8.74

—

15.04

Cash-Settled RSUs

2017

28.60

8.76

28.66

13.07

8.74

624
(66)
(14)
613

2016

(in thousands)

Weighted
Average Grant
Date Fair Value

(in thousands)

Weighted
Average Grant
Date Fair Value

587

187

(319)

(27)

428

18.02

40.12

16.42

22.76

28.58

817

258
(456)
(32)
587

13.95

27.48

15.92

20.17

18.02

498

650
(231)
(100)
817

29.96

7.26

26.06

22.19

13.95

The aggregate grant date fair value of RSUs vested during the years ended October 31, 2018, 2017, and 2016 was $7 million,
$9 million, and $8 million, respectively.

Performance-based Stock Options

Performance-based stock options represent the right to receive shares of common stock in the future, with the right to future
delivery of the shares subject to forfeiture or other restrictions that will lapse upon satisfaction of a combination of the
following conditions: service, market and performance conditions. Performance-based stock options have a seven-year
contractual life. Performance-based stock options subject to service and performance conditions are valued using the Black-
Scholes option pricing model and cliff-vest at the end of a three-year period, if performance measures are met. Performance-
based stock options subject to service and market conditions are valued using a Monte Carlo simulation and cliff-vest at the end
of a three-year period, if performance measures are met.

The following table summarizes the performance-based stock options subject to service and performance conditions activity:

For the Years Ended October 31,

2018

2017

2016

Weighted
Average
Exercise
Price

(in thousands)

Weighted
Average
Exercise
Price

(in thousands)

Options outstanding, at beginning of year...
Exercised ..............................................
Forfeited ...............................................
Options outstanding, at end of year.............

599
(13)

(434)
152

27.59
27.67

27.59
27.59

973

—
(374)
599

30.47

—
35.09

27.59

1,409

—
(436)
973

31.64

—
34.22

30.47

There were 151,968 performance-based stock options subject to service and performance conditions exercisable during the year
ended October 31, 2018.

125

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

The following table summarizes the performance-based stock options subject to service and market conditions activity:

For the Years Ended October 31,

2018

2017

2016

Weighted
Average
Exercise
Price

(in thousands)

Weighted
Average
Exercise
Price

(in thousands)

431

(44)

—

387

27.24

—

27.24

567
(130)
(6)
431

431

27.24

615

27.24

—
(48)
567

567

—

27.24

The total intrinsic value of stock options exercised during the years ended October 31, 2018 and October 31, 2017 was $0.9
million and $1.5 million, respectively.

Performance-based Stock Units

Performance-based stock units ("PUs") represent the right to receive one share of common stock ("share-settled PUs") or cash
equal to the value of one share of common stock ("cash-settled PUs") in the future, with the right to future delivery of the
shares or cash subject to forfeiture or other restrictions that will lapse upon satisfaction of a combination of the following
conditions: service, market, and performance conditions. Share and cash-settled PUs subject to service and performance
conditions are valued based on the fair value of the common stock at grant date and vest either at the end of the performance
period or cliff-vest at the end of a three-year period, if performance measures are met. Cash-settled PUs subject to service and
market conditions are valued using a Monte Carlo simulation and cliff-vest at the end of a three-year period, if performance
measures are met. Cash-settled PUs are classified as liabilities and are remeasured at each reporting date until settlement.

The following tables summarize PUs activity for the years ended October 31:

Share-Settled PUs subject to Service and Performance Conditions

2018

2017

2016

Weighted
Average
Grant Date
Fair Value

(in thousands)

Weighted
Average
Grant Date
Fair Value

(in thousands)

Nonvested, at beginning of year..................
Forfeited ...............................................
Nonvested, at end of year ............................

— $
—
—

—
—
—

— $
—
—

—
—
—

244
(244)
—

28.73
28.73
—

Cash-Settled PUs subject to Service and Performance Conditions

2018

2017

2016

Weighted
Average
Grant Date
Fair Value

(in thousands)

Weighted
Average
Grant Date
Fair Value

(in thousands)

Nonvested, at beginning of year ..................
Granted .................................................
Vested....................................................
Forfeited................................................
Nonvested, at end of year.............................

220
—

(121)

(99)
—

27.59
—

27.59

27.59
—

379

30.63

434

30.64

—

—
(159)
220

—

—
34.86

27.59

—

—
(55)
379

—

—
30.65

30.63

126

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

Cash Settled PUs subject to Service and Market Conditions

2018

2017

2016

Weighted
Average
Grant Date
Fair Value

(in thousands)

Weighted
Average
Grant Date
Fair Value

(in thousands)

Nonvested, at beginning of year ..................
Forfeited................................................
Nonvested, at end of year.............................

— $

—

70
(70)
—

50.52

—

172
(102)
70

69.64

82.86

50.52

Total Share-Based Compensation Expense

Total share-based compensation expense for the years ended October 31, 2018, 2017, and 2016 was $17 million, $25 million
and $15 million, respectively. As of October 31, 2018, the minimum performance measures for the fiscal year 2014
performance-based stock options and cash-settled PUs were not met and no share-based compensation expense was recorded.
However, fiscal year 2015 and 2016 performance-based stock options and cash-settled PUs partially met the overall
performance measures, and share-based compensation expense recorded was based on the interpolated calculated future pay
out. Share-based compensation expense will be adjusted each reporting period based on the available current performance
measures information for all awards subject to performance conditions. We record share-based compensation expense on a
straight-line basis over the required service period which is equal to the vesting period, beginning on the grant date. Share-
based compensation expense is included in Selling, general and administrative expenses in the Consolidated Statements of
Operations. As of October 31, 2018, there was $14 million of total unrecognized compensation expense related to non-vested
share-based awards which is expected to be recognized over a weighted average period of approximately one year.

We received cash of $8 million, $12 million, and zero during the years ended October 31, 2018, 2017 and 2016, respectively,
related to stock options exercised. We used cash of $13 million, $13 million, and $2 million during the years ended October 31,
2018, 2017, and 2016, respectively, to settle cash-settled RSUs. We did not realize any tax benefit from stock options exercised
for fiscal years 2018 and 2017. There were no stock options exercised in 2016.

127

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

18. Supplemental Cash Flow Information

The following table provides additional information about our Consolidated Statements of Cash Flows:

(6)
12
6

2
6
(20)
(12)

8
(11)
(165)
(47)
(114)
(41)
(370)

291
44

1
(27)

For the Years Ended October 31,

2018

2017

2016

(in millions)
Equity in income of affiliated companies, net of dividends

Equity in income of non-consolidated affiliates ........................................................ $
Dividends from non-consolidated affiliates...............................................................

Equity in income of non-consolidated affiliates, net of dividends ..................... $

Other non-cash operating activities

Loss (gain) on sale of property and equipment.......................................................... $
Loss on sale and impairment of repossessed collateral .............................................
Income from non-cash leases.....................................................................................

Other non-cash operating activities .................................................................... $

Changes in other assets and liabilities

Other current assets.................................................................................................... $
Other noncurrent assets..............................................................................................
Other current liabilities ..............................................................................................
Postretirement benefits liabilities...............................................................................
Other noncurrent liabilities ........................................................................................
Other, net....................................................................................................................

Changes in other assets and liabilities ................................................................ $

Cash paid during the year

— $
7
7

— $
1
(24)
(23) $

(7) $
(19)
116
(131)
58
9
26

(6) $
7
1

(9) $
7
(26)
(28) $

(19) $
(38)
(35)
(65)
(62)
(7)
(226) $

Interest, net of amounts capitalized ........................................................................... $
Income taxes, net of refunds ......................................................................................

306
18

294
19

Non-cash investing and financing activities

Property and equipment acquired under capital leases .............................................. $
Transfers to inventories from property and equipment for leases to others...............

— $
(9)

— $
(7)

128

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

19. Selected Quarterly Financial Data (Unaudited)

The following tables provide our quarterly condensed consolidated statements of operations and financial data:

(in millions, except for per share data and stock prices)
Sales and revenues, net ................................................................................... $
Manufacturing gross margin(A)........................................................................
Amounts attributable to Navistar International Corporation common
shareholders:
Income (loss) from continuing operations, net of tax ..................................... $
Income (loss) from discontinued operations, net of tax..................................

Net income (loss) ....................................................................................... $

Earnings (loss) per share attributable to Navistar International Corporation:

Basic:

Continuing operations(B) ........................................................................ $
Discontinued operations(B).....................................................................

Diluted:

Continuing operations(B) ........................................................................ $
Discontinued operations(B).....................................................................

(in millions, except for per share data and stock prices)
Sales and revenues, net ................................................................................... $
Manufacturing gross margin(A)........................................................................
Amounts attributable to Navistar International Corporation common
shareholders:
Income from continuing operations, net of tax ............................................... $
Income from discontinued operations, net of tax............................................

Net income ................................................................................................. $

Earnings per share attributable to Navistar International Corporation:

Basic:

Continuing operations(B) ........................................................................ $
Discontinued operations(B).....................................................................

Diluted:

Continuing operations(B) ........................................................................ $
Discontinued operations(B).....................................................................

_______________________

First Quarter Ended
January 31,

Second Quarter Ended
April 30,

2018

2017

2018

2017

1,905
335

1,663
259

2,422
395

(73) $
—
(73) $

(62) $
—
(62) $

(0.74) $
—
(0.74) $

(0.76) $
—
(0.76) $

55
—
55

0.56
—
0.56

0.55
—
0.55

2,096
287

(80)
—
(80)

(0.86)
—
(0.86)

Third Quarter Ended
July 31,

Fourth Quarter Ended
October 31,

2018

2017

2018

2017

2,606
470

170
—
170

1.72
—
1.72

1.71
—
1.71

2,213
375

36
1
37

0.37
0.01
0.38

3,317
573

188
—
188

1.90
—
1.90

1.89
—
1.89

2,598
470

135
—
135

1.37
—
1.37

1.36
—
1.36

(A) Manufacturing gross margin is calculated by subtracting Costs of products sold from Sales of manufactured products, net.

(B) Earnings per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while earnings per share for
the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters earnings per share
may not equal the full year earnings per share.

129

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

20. Subsequent Events

130

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to
ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is
accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures.

In connection with the preparation of this report, management, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of October 31, 2018. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of October 31, 2018, our disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting

There were no material changes in our internal control over financial reporting identified in connection with the evaluation
required by Rules 13a-15 and 15d-15 under the Exchange Act that occurred during the quarter ended October 31, 2018 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, and
under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by management and our Board
of Directors to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies
and procedures that:

•

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of assets of the Company.

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial
statements in accordance with U.S. GAAP and that receipts and expenditures of the Company are being made in
accordance with authorization of our management and our Board of Directors.

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
our assets that could have a material effect on our consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also,
projections of any evaluation of the effectiveness of our internal control over financial reporting to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of the internal control over financial reporting as of October 31, 2018 using the criteria set forth by the Internal
Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). As a result of that evaluation, management concluded that our internal control over financial reporting was effective as
of October 31, 2018.

Our independent registered public accounting firm, KPMG LLP, has audited the Company's consolidated financial statements
and the effectiveness of the Company's internal control over financial reporting as of October 31, 2018. Their reports appear in
this Annual Report on Form 10-K.

Item 9B.

Other Information

None.

131

PART III

Item 10.

Directors, Executive Officers, and Corporate Governance

A list of our executive officers and their respective biographical information appears in Part I, Item 1 of this report. Information
about our directors may be found under the caption "Proposal 1-Election of Directors" in our proxy statement for the 2019
annual meeting of stockholders scheduled to be held on February 12, 2019 (the "Proxy Statement"). Information about our
Audit Committee may be found under the captions "Board Committees and Meetings" and "Audit Committee Report" in the
Proxy Statement. Information about the procedures by which security holders may recommend nominees to our Board of
Directors may be found under the caption "Nominating Directors" in the Proxy Statement. That information is incorporated
herein by reference.

The information in the Proxy Statement set forth under the captions "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.

132

PART IV

Item 15.

Exhibits and Financial Statement Schedules

Financial Statements

See Item 8—Financial Statements and Supplementary Data

Financial statement schedules are omitted because of the absence of the conditions under which they are required or because
information called for is shown in the consolidated financial statements and notes thereto.

Exhibit:

(3)*
(4)*
(10)*
(11)*

Description
Articles of Incorporation and By-Laws..............................................................................................
Instruments Defining Rights of Security Holders, including Indentures ...........................................
Material Contracts ..............................................................................................................................
Computation of Earnings (Loss) Per Share (incorporated by reference from Note 16. Earnings
(Loss) Per Share Attributable to Navistar International Corporation, to the accompanying
consolidated financial statements) .....................................................................................................

Subsidiaries of the Registrant.............................................................................................................
(21)*
Consent of Independent Registered Public Accounting Firm ............................................................
(23.1)*
Power of Attorney ..............................................................................................................................
(24)*
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ...............................
(31.1)*
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ...............................
(31.2)*
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ...............................
(32.1)*
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ...............................
(32.2)*
Additional Financial Information (Unaudited) ..................................................................................
(99.1)
(101.INS)*
XBRL Instance Document .................................................................................................................
(101.SCH)* XBRL Taxonomy Extension Schema Document ...............................................................................
(101.CAL)* XBRL Taxonomy Extension Calculation Linkbase Document..........................................................
(101.LAB)* XBRL Taxonomy Extension Label Linkbase Document...................................................................
(101.PRE)* XBRL Taxonomy Extension Presentation Linkbase Document ........................................................
(101.DEF)* XBRL Taxonomy Extension Definition Linkbase Document............................................................

Page
E-1
E-2
E-3

120
E-10
E-11
E-12
E-13
E-14
E-15
E-16
E-17
N/A
N/A
N/A
N/A
N/A
N/A

Indicates exhibits not included within this 2018 Annual Report to Shareholders. These exhibits were included within our Annual Report on Form 10-K for
the year ended October 31, 2018, which was filed on December 18, 2018.

All exhibits other than those indicated above are omitted because of the absence of the conditions under which they are required
or because the information called for is shown in the consolidated financial statements and notes thereto in the Annual Report
on Form 10-K for the period ended October 31, 2018.

Item 16. Summary

None.

133

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

SIGNATURE

NAVISTAR INTERNATIONAL CORPORATION
(Registrant)

/s/ SAMARA A. STRYCKER

Samara A. Strycker
Senior Vice President and Corporate Controller
(Principal Accounting Officer)

December 18, 2018

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature

Title

Date

/s/ TROY A. CLARKE

Troy A. Clarke

/s/ WALTER G. BORST
Walter G. Borst

/s/ SAMARA A. STRYCKER
Samara A. Strycker

/s/ JOSÉ MARIA ALAPONT
José Maria Alapont

/s/ STEPHEN R. D'ARCY
Stephen R. D'Arcy

/s/ JEFFREY A. DOKHO
Jeffrey A. Dokho

/s/ VINCENT J. INTRIERI

Vincent J. Intrieri

/s/ RAYMOND T. MILLER
Raymond T. Miller

/s/ MARK H. RACHESKY
Mark H. Rachesky

/s/ ANDREAS H. RENSCHLER

Andreas H. Renschler

/s/ CHRISTIAN SCHULZ

Christian Schulz

/s/ KEVIN M. SHEEHAN
Kevin M. Sheehan

/s/ DENNIS A. SUSKIND
Dennis A. Suskind

Chairman, President,
Chief Executive Officer
(Principal Executive Officer)

Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

Senior Vice President and
Corporate Controller
(Principal Accounting Officer)

Director

134

December 18, 2018

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 operations and our Financial Services operations on an after-
tax equity basis. Our Manufacturing operations, for this purpose, include our Truck segment, Parts segment, Global Operations
segment, and Corporate items. The Manufacturing operations financial information represents non-GAAP financial measures.
These non-GAAP financial measures should be considered supplemental to, and not as a substitute for, or superior to, financial
measures calculated in accordance with U.S. GAAP. The reconciling differences between these non-GAAP financial measures
and our U.S. GAAP condensed consolidated financial statements in Item 8, Financial Statements, are our Financial Services
operations, which are included on an after-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' equity (deficit), the intercompany debt is reflected as accounts payable. The change in the
intercompany debt is reflected in the Net cash provided by (used in) operating activities in the condensed statements of cash
flows.

Condensed Statements of Revenues and Expenses
Navistar International Corporation
(Manufacturing operations with financial services operations on an after-tax equity basis)

For the Year Ended October 31, 2018

Financial
Services
Operations

Adjustments

Consolidated
Statement of
Operations

Manufacturing
Operations

(in millions)
Sales of manufactured products.................................................. $
Finance revenues ........................................................................
Sales and revenues, net ........................................................
Costs of products sold.................................................................
Restructuring charges .................................................................
Asset impairment charges...........................................................
Selling, general and administrative expenses .............................
Engineering and product development costs ..............................
Interest expense ..........................................................................
Other expense (income), net .......................................................
Total costs and expenses ......................................................
Equity in income of non-consolidated affiliates .........................
Income before equity income from financial services
operations and income taxes.......................................................
Equity income from financial services operations......................
Income from continuing operations before income tax..............
Income tax expense.....................................................................
Income from continuing operations............................................
Income from discontinued operations, net of tax .......................
Net income .............................................................................
Less: Net income attributable to non-controlling interests ....

10,090

— $

—
10,090

8,317
(1)
13

831

297

235

66
9,758

—

332
71
403
(35)
368
—
368
28

257
257

—

92
(17)
169

—

88
—
88
(17)
71
—
71
—

— $
(97)
(97)
—

—

—
(2)
—

—
(95)
(97)
—

—
(71)
(71)
—
(71)
—
(71)
—

Net income attributable to Navistar International
Corporation ............................................................................... $

340

(71) $

E-17

10,090

160
10,250

8,317
(1)
14

922

297

327
(46)
9,830

—

420
—
420
(52)
368
—
368
28

340

Condensed Statements of Revenues and Expenses
Navistar International Corporation
(Manufacturing operations with financial services operations on an after-tax equity basis)

For the Year Ended October 31, 2017

Financial
Services
Operations

Adjustments

Consolidated
Statement of
Operations

Manufacturing
Operations

8,428

142

8,570

7,037

878

251

351
(21)
8,512

—

64
(10)
54

(in millions)
Sales of manufactured products.................................................. $
Finance revenues ........................................................................
Sales and revenues, net ........................................................
Costs of products sold.................................................................
Restructuring charges .................................................................
Asset impairment charges...........................................................
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 equity income from financial services
operations and income taxes.......................................................
Equity income from financial services operations......................
Income from continuing operations before income taxes...........
Income tax benefit (expense)......................................................
Income from continuing operations............................................
Income from discontinued operations, net of tax .......................
Net income..................................................................................
Less: Net income attributable to non-controlling interests ....

8,428

— $

—

8,428

7,037

797

251

269

77
8,447

(13)
62

235

—

86
(11)
158

—

77
(15)
62

—

— $
(93)
(93)
—

—

—
(2)
—
(4)
(87)
(93)
—

—
(62)
(62)
—
(62)
—
(62)
—

Net income attributable to Navistar International
Corporation ............................................................................... $

(62) $

E-18

Condensed Statements of Revenues and Expenses
Navistar International Corporation
(Manufacturing operations with financial services operations on an after-tax equity basis)

For the Year Ended October 31, 2016

Financial
Services
Operations

Adjustments

Consolidated
Statement of
Operations

Manufacturing
Operations

7,976

135

8,111

6,812

802

247

327
(76)
8,149

(32)
—
(32)
(33)
(65)
—
(65)
32

(97)

(in millions)
Sales of manufactured products.................................................. $
Finance revenues ........................................................................
Sales and revenues, net ........................................................
Costs of products sold.................................................................
Restructuring charges .................................................................
Asset impairment charges...........................................................
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 equity income from financial services
operations and income taxes.......................................................
Equity income from financial services operations......................
Income (loss) from continuing operations before income taxes.
Income tax expense.....................................................................
Income (loss) from continuing operations..................................
Income from discontinued operations, net of tax .......................
Net income (loss)........................................................................
Less: Net Income attributable to non-controlling interests....

7,976

— $

—

7,976

6,812

723

247

256

39
8,114

(132)
67
(65)
—
(65)
—
(65)
32

235

—

80
(26)
135

—

100

—

100
(33)
67

—

(100)
(100)
—

—

—
(2)
—
(9)
(89)
(100)
—

—
(67)
(67)
—
(67)
—
(67)
—

Net income (loss) attributable to Navistar International
Corporation ............................................................................... $

(97) $

(67) $

E-19

Condensed Statements of Assets, Liabilities, and Stockholders' Equity (Deficit)
Navistar International Corporation
(Manufacturing operations with financial services operations on an after-tax equity basis)

Manufacturing
Operations

As of October 31, 2018

Financial
Services
Operations

Adjustments

Consolidated
Balance Sheet

1,261

101

505

1,102

1,060

581

50
117

314
5,163

1,664

3,426

2,097

1,902
9,089

—

2,259

—

310

—

—
4

18
2,749

2,041

—

84
2,168

—

— $

1,320

—

—
(101)
—

—

—
(581)
—
—

—
(682) $

(101) $
—

—

—
(101)

—

101

125

2,663

1,110

1,370

—

50
121

332
7,230

1,606

5,467

2,097

1,986
11,156

(3,931)
5,163

581
2,749

(581)
(682) $

(3,931)
7,230

(in millions)
Assets
Cash and cash equivalents ......................................................... $
Marketable securities .................................................................
Restricted cash ...........................................................................
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 ................................................................................

Total assets ........................................................................... $

Liabilities and stockholders' equity (deficit)
Accounts payable ....................................................................... $
Debt............................................................................................
Postretirement benefits liabilities...............................................
Other liabilities...........................................................................
Total liabilities ..........................................................................
Stockholders' equity attributable to non-controlling
interest.......................................................................................
Stockholders' equity (deficit) attributable to controlling
interest.......................................................................................

Total liabilities and stockholders' equity (deficit) ............ $

E-20

Manufacturing
Operations

As of October 31, 2017

Financial
Services
Operations

Adjustments

Consolidated
Balance Sheet

—

110

1,854

—

243

—

—
4

2,276

1,651

—

1,759

—

517

2,276

— $

—

—
(69)
—

—

—
(517)
—
—

—
(586) $

(69) $
—

—

—
(69)

—

706

370

134

2,189

857

1,326

—

56
129

330

6,135

1,292

5,058

2,556

1,803

10,709

(517)
(586) $

(4,578)
6,135

666

370

404

850

1,083

517

56
125

312

1,330

3,407

2,556

1,726

9,019

(4,578)
4,445

Total assets ........................................................................... $

4,445

Total liabilities and stockholders' equity (deficit) ............ $

E-21

Condensed Statements of Cash Flows
Navistar International Corporation
(Manufacturing operations with financial services operations on an after-tax equity basis)

(in millions)
Cash flows from operating activities
Net income................................................................................... $
Adjustments to reconcile net income to cash provided by (used
in) operating activities:

For the Year Ended October 31, 2018

Financial
Services
Operations

Adjustments

Condensed
Consolidated
Statement of
Cash Flows

Manufacturing
Operations

368

(71) $

368

Depreciation and amortization................................................
Depreciation of equipment leased to others............................
Amortization of debt issuance costs and discount..................
Deferred income taxes ............................................................
Asset impairment charges.......................................................
Equity in income of financial services affiliates.....................
Dividends from non-consolidated affiliates............................
Change in intercompany receivables and payables ................
Other, net ................................................................................
Net cash provided by (used in) operating activities ...........

Cash flows from investing activities
Purchases of marketable securities..............................................
Sales of marketable securities .....................................................
Maturities of marketable securities .............................................
Net change in restricted cash and cash equivalents.....................
Capital expenditures ....................................................................
Purchase of equipment leased to others.......................................
Other investing activities.............................................................
Net cash provided by (used in) investing activities ............
Net cash provided by financing activities ...........................

139

13
(71)
7
(84)
2
419

(251)
460

60
(10)
(112)
(93)
—
54
137

9
(2)
1

—
—

84
(368)
(150)

—

19
(1)
(139)
8
(113)
277

—

71
—

—

—
—

—

—
—
—

140

—
7

—
(366)
269

(251)
460

9
(113)
(232)
8
(59)
414

Effect of exchange rate changes on cash and cash
equivalents..................................................................................
Increase in cash and cash equivalents .....................................
Cash and cash equivalents at beginning of the year...............
Cash and cash equivalents at end of the year ......................... $

(15)
595
666
1,261

5
19
40
59

—
—
—
— $

(10)
614
706
1,320

E-22

Condensed Statements of Cash Flows
Navistar International Corporation
(Manufacturing operations with financial services operations on an after-tax equity basis)

(in millions)
Cash flows from operating activities
Net income ................................................................................... $
Adjustments to reconcile net income to cash provided by (used
in) operating activities:

For the Year Ended October 31, 2017

Financial
Services
Operations

Adjustments

Condensed
Consolidated
Statement of
Cash Flows

Manufacturing
Operations

(62) $

Depreciation and amortization................................................
Depreciation of equipment leased to others............................
Amortization of debt issuance costs and discount..................
Deferred income taxes ............................................................
Asset impairment charges.......................................................
Gain on sales of investments and businesses, net...................
Equity in income of non-consolidated affiliates .....................
Equity in income of financial services 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 of marketable securities .....................................................
Maturities of marketable securities .............................................
Net change in restricted cash and cash equivalents.....................
Capital expenditures ....................................................................
Purchase of equipment leased to others.......................................
Other investing activities.............................................................
Net cash used in investing activities ....................................
Net cash provided by (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 year...............
Cash and cash equivalents at end of the year ......................... $

148

37
(3)
13
(5)
(6)
(62)
8

7
(106)
(100)
10

(1,011)
652

28
(2)
(101)
(84)
29
(489)
389

(5)
(95)
761

666

12
(3)
—

—

106
(121)
107

—

—
(20)
(1)
(53)
14
(53)
(59)

2
(3)
43

—

62
(8)
—

—

—
(8)

—

—
—

—

— $

150

49
(6)
13
(5)
(6)
—

—

—
(221)
109

(1,011)
659

28
(22)
(102)
(137)
43
(542)
338

(3)
(98)
804

706

E-23

Condensed Statements of Cash Flows
Navistar International Corporation
(Manufacturing operations with financial services operations on an after-tax equity basis)

(in millions)
Cash flows from operating activities
Net income (loss)......................................................................... $
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:

For the Year Ended October 31, 2016

Financial
Services
Operations

Adjustments

Consolidated
Statement of
Operations

Manufacturing
Operations

(65) $

(67) $

(65)

Deferred income taxes ............................................................
Asset impairment charges.......................................................
Loss on sales of investments and businesses, net ...................
Equity in income of non-consolidated affiliates .....................
Equity in income of financial services operations..................
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 of marketable securities .....................................................
Maturities of marketable securities .............................................
Net change in restricted cash and cash equivalents.....................
Capital expenditures ....................................................................
Purchase of equipment leased to others.......................................
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..................................................................................
Increase (decrease) in cash and cash equivalents ...................
Cash and cash equivalents at beginning of the year...............
Cash and cash equivalents at end of the year ......................... $

144

(13)
23

2
(6)
(67)
220

12
(74)
(175)
56

(485)
539

1
(114)
(20)
39
3
(203)

28
(116)
877

761

—

219

431

—

4
(2)
(112)
24
(70)
(370)

—

67
(220)
—

—

—
(220)

—

—
—

220

—

— $

146

(9)
27

2
(6)
—

—

267

(485)
555

5
(116)
(132)
63
(67)
(353)

45
(108)
912

804

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