XNYS:NAV Navistar International Corp Quarterly Report 10-Q Filing - 7/31/2012

Effective Date 7/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-Q
___________________________________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2012

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to        
   Commission file number 1-9618
___________________________________________________

 
NAVISTAR INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________________
Delaware
36-3359573
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
2701 Navistar Drive, Lisle, Illinois
60532
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code (331) 332-5000
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
þ
  
Accelerated filer
 
o
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
(Do not check if a smaller reporting company)
  
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  þ
As of August 31, 2012, the number of shares outstanding of the registrant’s common stock was 68,588,952, net of treasury shares.
 
 
 
 
 



NAVISTAR INTERNATIONAL CORPORATION FORM 10-Q
INDEX

 
 
 
Page
PART I—Financial Information
 
 
Item 1.
 
4
 
 
4
 
 
5
 
 
6
 
 
7
 
 
8
 
 
9
Item 2.
 
45
Item 3.
 
63
Item 4
 
63
 
 
 
 
PART II—Other Information
 
 
Item 1.
 
64
Item 1A.
 
64
Item 2.
 
67
Item 3.
 
67
Item 4.
 
67
Item 5.
 
67
Item 6.
 
68
 
 
69


2


Disclosure Regarding Forward-Looking Statements
Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements only speak as of the date of this report and Navistar International Corporation assumes no obligation to update the information included in this report.
Such forward-looking statements include, but are not limited to, statements concerning:
estimates we have made in preparing our financial statements;
our development of new products and technologies;
the anticipated sales, volume, demand, and markets for our products;
the anticipated performance and benefits of our products and technologies, including our advanced clean engine solutions;
our business strategies relating to, and our ability to meet federal and state regulatory heavy duty diesel emission standards applicable to certain of our engines, including the timing and costs of compliance and consequences of noncompliance with such standards;
our business strategies and long-term goals, and activities to accomplish such strategies and goals;
anticipated benefits from acquisitions, strategic alliances, and joint ventures we complete;
our expectations relating to the dissolution of our Blue Diamond Truck joint venture with Ford expected in December 2014;
our expectations and estimates relating to restructuring activities, including restructuring and integration charges and timing of cash payments related thereto, and operational flexibility, savings, and efficiencies from such restructurings;
our expectations relating to our cost reduction initiatives, including our voluntary separation program, involuntary reduction in force, and other reductions to reduce discretionary spending;
our expectations relating to our retail finance receivables and retail finance revenues;
our anticipated costs relating to the development of our emissions solutions products;
our anticipated capital expenditures;
our expectations relating to payments of taxes;
our expectations relating to warranty costs;
our expectations relating to interest expenses;
costs relating to litigation and similar matters;
estimates relating to pension plan contributions;
trends relating to commodity prices; and
anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations.
These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to differences in our future results include those discussed in Part I, Item 1A, Risk Factors, included within our Annual Report on Form 10-K for the year ended October 31, 2011, which was filed with the United States Securities and Exchange Commission ("SEC") on December 20, 2011 and Part II, Item 1A, Risk Factors, of our Quarterly Report on Form 10-Q for the fiscal quarters ended January 31, 2012 and April 30, 2012, which were filed with the SEC on March 8, 2012 and June 6, 2012, respectively, as well as those discussed elsewhere in this report. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained 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 Exchange Act and as a result, are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the SEC. We make these filings available free of charge on our website (http://www.navistar.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC. Any materials we file with, or furnish to, the SEC may also be read and/or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

3


PART I—Financial Information

Item 1.     Financial Statements

Navistar International Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions, except per share data)
2012
 
2011
 
2012
 
2011
Sales and revenues
 
 
 
 
 
 
 
Sales of manufactured products, net
$
3,277

 
$
3,490

 
$
9,540

 
$
9,481

Finance revenues
42

 
47

 
129

 
154

Sales and revenues, net
3,319

 
3,537

 
9,669

 
9,635

Costs and expenses
 
 
 
 
 
 
 
Costs of products sold
2,876

 
2,930

 
8,518

 
7,830

Restructuring charges
4

 
56

 
24

 
80

Impairment of property and equipment and intangible assets

 
64

 
38

 
64

Selling, general and administrative expenses
328

 
334

 
1,068

 
1,006

Engineering and product development costs
137

 
141

 
408

 
407

Interest expense
59

 
62

 
182

 
187

Other expense (income), net
5

 
(18
)
 
26

 
(39
)
Total costs and expenses
3,409

 
3,569

 
10,264

 
9,535

Equity in loss of non-consolidated affiliates
(10
)
 
(22
)
 
(21
)
 
(55
)
Income (loss) before income taxes
(100
)
 
(54
)
 
(616
)
 
45

Income tax benefit
196

 
1,463

 
410

 
1,458

Net income (loss)
96

 
1,409

 
(206
)
 
1,503

Less: Net income attributable to non-controlling interests
12

 
9

 
35

 
35

Net income (loss) attributable to Navistar International Corporation
$
84

 
$
1,400

 
$
(241
)
 
$
1,468

 
 
 
 
 


 


Earnings (loss) per share attributable to Navistar International Corporation:
 
 
 
 
 
 
 
Basic
$
1.22

 
$
19.10

 
$
(3.49
)
 
$
20.13

Diluted
1.22

 
18.24

 
(3.49
)
 
19.04

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
68.7

 
73.3

 
69.1

 
73.0

Diluted
68.9

 
76.8

 
69.1

 
77.1


See Notes to Condensed Consolidated Financial Statements
4


Navistar International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
(in millions)
Three Months Ended July 31,
 
Nine Months Ended July 31,
2012
 
2011
 
2012
 
2011
Net income (loss) attributable to Navistar International Corporation
$
84

 
$
1,400

 
$
(241
)
 
$
1,468

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustment
(61
)
 
4

 
(139
)
 
65

Defined benefit plans (net of tax of $13, $31, $36, and $31, respectively)
23

 
(14
)
 
63

 
65

Total other comprehensive income (loss)
(38
)
 
(10
)
 
(76
)
 
130

Total comprehensive income (loss) attributable to Navistar International Corporation
$
46

 
$
1,390

 
$
(317
)
 
$
1,598


See Notes to Condensed Consolidated Financial Statements
5


Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
(in millions, except per share data)
July 31,
2012
 
October 31,
2011
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
547

 
$
539

Restricted cash
125

 
100

Marketable securities
159

 
718

Trade and other receivables, net
822

 
1,219

Finance receivables, net
1,812

 
2,198

Inventories
1,877

 
1,714

Deferred taxes, net
480

 
474

Other current assets
293

 
273

Total current assets
6,115

 
7,235

Restricted cash
154

 
227

Trade and other receivables, net
110

 
122

Finance receivables, net
523

 
715

Investments in non-consolidated affiliates
46

 
60

Property and equipment (net of accumulated depreciation and amortization of $2,170 and $2,056 at the respective dates)
1,646

 
1,570

Goodwill
280

 
319

Intangible assets (net of accumulated amortization of $100 and $99, at the respective dates)
179

 
234

Deferred taxes, net
1,926

 
1,583

Other noncurrent assets
164

 
226

Total assets
$
11,143

 
$
12,291

LIABILITIES and STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
1,416

 
$
1,379

Accounts payable
1,816

 
2,122

Other current liabilities
1,298

 
1,297

Total current liabilities
4,530

 
4,798

Long-term debt
2,996

 
3,477

Postretirement benefits liabilities
3,057

 
3,210

Deferred taxes, net
56

 
59

Other noncurrent liabilities
862

 
719

Total liabilities
11,501

 
12,263

Redeemable equity securities
5

 
5

Stockholders’ equity (deficit)
 
 
 
Series D convertible junior preference stock
3

 
3

Common stock ($0.10 par value per share, 220.0 shares authorized, and 75.4 shares issued, at both dates)
8

 
7

Additional paid in capital
2,274

 
2,253

Accumulated deficit
(396
)
 
(155
)
Accumulated other comprehensive loss
(2,020
)
 
(1,944
)
Common stock held in treasury, at cost (6.8 and 4.9 shares, at the respective dates)
(276
)
 
(191
)
Total stockholders’ deficit attributable to Navistar International Corporation
(407
)
 
(27
)
Stockholders’ equity attributable to non-controlling interests
44

 
50

Total stockholders’ equity (deficit)
(363
)
 
23

Total liabilities and stockholders’ equity (deficit)
$
11,143

 
$
12,291



See Notes to Condensed Consolidated Financial Statements
6


Navistar International Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended July 31,
(in millions)
2012
 
2011
Cash flows from operating activities
 
 
 
Net income (loss)
$
(206
)
 
$
1,503

Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Depreciation and amortization
209

 
217

Depreciation of equipment leased to others
37

 
28

Deferred taxes, including change in valuation allowance
(405
)
 
(1,472
)
Impairment of property and equipment and intangible assets
38

 
73

Amortization of debt issuance costs and discount
31

 
33

Stock-based compensation
16

 
33

Provision for doubtful accounts, net of recoveries

 
(5
)
Equity in loss of non-consolidated affiliates, net of dividends
27

 
57

Write-off of debt issuance cost and discount
8

 

Other non-cash operating activities
5

 
(9
)
Changes in other assets and liabilities, exclusive of the effects of businesses acquired and disposed
586

 
81

Net cash provided by operating activities
346

 
539

Cash flows from investing activities
 
 
 
Purchases of marketable securities
(672
)
 
(1,109
)
Sales or maturities of marketable securities
1,230

 
1,075

Net change in restricted cash and cash equivalents
48

 
21

Capital expenditures
(250
)
 
(291
)
Purchase of equipment leased to others
(49
)
 
(35
)
Proceeds from sales of property and equipment
12

 
27

Investments in non-consolidated affiliates
(18
)
 
(48
)
Proceeds from sales of affiliates
1

 
6

Business acquisitions, net of cash received
(12
)
 
(1
)
Acquisition of intangibles
(14
)
 
(15
)
Net cash provided by (used in) investing activities
276

 
(370
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt
1,155

 
348

Principal payments on securitized debt
(1,532
)
 
(560
)
Proceeds from issuance of non-securitized debt
717

 
158

Principal payments on non-securitized debt
(582
)
 
(73
)
Net decrease in notes and debt outstanding under revolving credit facilities
(195
)
 
(85
)
Principal payments under financing arrangements and capital lease obligations
(30
)
 
(81
)
Debt issuance costs
(20
)
 
(6
)
Purchase of treasury stock
(75
)
 
(11
)
Proceeds from exercise of stock options
2

 
36

Dividends paid by subsidiaries to non-controlling interest
(44
)
 
(43
)
Other financing activities
(3
)
 

Net cash used in financing activities
(607
)
 
(317
)
Effect of exchange rate changes on cash and cash equivalents
(7
)
 
7

Increase (decrease) in cash and cash equivalents
8

 
(141
)
Cash and cash equivalents at beginning of the period
539

 
585

Cash and cash equivalents at end of the period
$
547

 
$
444


See Notes to Condensed Consolidated Financial Statements
7


Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
(in millions)
Series D
Convertible
Junior
Preference
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Common
Stock
Held in
Treasury,
at cost
 
Stockholders'
Equity
Attributable
to Noncontrolling
Interests
 
Total
Balance as of October 31, 2011
$
3

 
$
7

 
$
2,253

 
$
(155
)
 
$
(1,944
)
 
$
(191
)
 
$
50

 
$
23

Net income (loss)
 
 
 
 
 
 
(241
)
 
 
 
 
 
35

 
(206
)
Total other comprehensive loss
 
 
 
 
 
 
 
 
(76
)
 
 
 
 
 
(76
)
Stock-based compensation
 
 
 
 
14

 
 
 
 
 
 
 
 
 
14

Stock ownership programs
 
 
 
 
(10
)
 
 
 
 
 
11

 
 
 
1

Stock repurchase programs
 
 
 
 
20

 
 
 
 
 
(95
)
 
 
 
(75
)
Cash dividends paid to non-controlling interest
 
 
 
 
 
 
 
 
 
 
 
 
(44
)
 
(44
)
Increase in ownership interest acquired from non-controlling interest holder
 
 
 
 
(3
)
 
 
 
 
 
 
 
3

 

Other
 
 
1

 
 
 
 
 


 
(1
)
 
 
 

Balance as of July 31, 2012
$
3

 
$
8

 
$
2,274

 
$
(396
)
 
$
(2,020
)
 
$
(276
)
 
$
44

 
$
(363
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of October 31, 2010
$
4

 
$
7

 
$
2,206

 
$
(1,878
)
 
$
(1,196
)
 
$
(124
)
 
$
49

 
$
(932
)
Net income
 
 
 
 
 
 
1,468

 
 
 
 
 
35

 
1,503

Total other comprehensive income
 
 
 
 
 
 
 
 
130

 
 
 
 
 
130

Transfer from redeemable equity securities upon exercise or expiration of stock options
 
 
 
 
3

 
 
 
 
 
 
 
 
 
3

Stock-based compensation
 
 
 
 
24

 
 
 
 
 
 
 
 
 
24

Stock ownership programs
 
 
 
 
10

 
 
 
 
 
23

 
 
 
33

Stock repurchase programs
 
 
 
 
 
 
 
 
 
 
(11
)
 
 
 
(11
)
Cash dividends paid to non-controlling interest
 
 
 
 
 
 
 
 
 
 
 
 
(43
)
 
(43
)
Impact to additional paid-in capital for valuation allowance release
 
 
 
 
45

 
 
 
 
 
 
 
 
 
45

Other
(1
)
 
 
 
1

 
 
 
 
 
 
 


 

Balance as of July 31, 2011
$
3

 
$
7

 
$
2,289

 
$
(410
)
 
$
(1,066
)
 
$
(112
)
 
$
41

 
$
752


See Notes to Condensed Consolidated Financial Statements
8


Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Organization and Description of the Business
Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating subsidiaries are Navistar, Inc. and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer collectively to NIC, its subsidiaries, and certain variable interest entities ("VIEs") of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Engine, Parts (collectively called "manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively called "financial services operations"). These segments are discussed in Note 13, Segment Reporting.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our manufacturing operations, majority-owned dealers ("Dealcors"), financial services operations, and VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts.
We prepared the accompanying unaudited consolidated financial statements in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the United States Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for comprehensive annual financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended October 31, 2011 and should be read in conjunction with the disclosures therein. In our opinion, these interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.
Variable Interest Entities
We have an interest in several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our VIEs that we are the primary beneficiary because we have the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and have the obligation to absorb losses of the VIE that could potentially be significant to the VIE 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 the consolidated entities. Assets of these entities are not available to satisfy claims against our general assets.
We are the primary beneficiary of our Blue Diamond Parts ("BDP") and Blue Diamond Truck ("BDT") joint ventures with Ford Motor Company ("Ford"). As a result, our Consolidated Balance Sheets include assets of $250 million and $306 million and liabilities of $117 million and $158 million as of July 31, 2012 and October 31, 2011, respectively, from BDP and BDT, including $28 million and $38 million of cash and cash equivalents, at the respective dates, which are not readily available to satisfy our other obligations. The creditors of BDP and BDT do not have recourse to our general credit. In December 2011, Ford notified the Company of its intention to dissolve the BDT joint venture effective December 2014. We do not expect the dissolution of the BDT joint venture to have a material impact on our consolidated financial statements.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include assets of $1.4 billion and $1.8 billion as of July 31, 2012 and October 31, 2011, respectively, and liabilities of $1.2 billion and $1.5 billion as of July 31, 2012 and October 31, 2011, respectively, all of which are involved in securitizations that are treated as borrowings. In addition, our Consolidated Balance Sheets include assets of $372 million and $468 million and related liabilities of $132 million and $216 million as of July 31, 2012 and October 31, 2011, respectively, all of which are involved in transactions that do not qualify for sale accounting treatment and are therefore treated as borrowings. Investors that hold securitization debt have a priority claim on the cash flows generated by their respective securitized assets to the extent that those trusts are entitled to make principal and interest payments. Investors in securitizations of these entities have no recourse to our general credit.

9

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

We are also involved with 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 loss of non-consolidated affiliates includes our share of the net income (loss) of these entities.
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. 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, asbestos and other product liability accruals, asset impairment, 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 concentrations of union employees and one customer. As of July 31, 2012, approximately 4,700, or 48%, of our hourly workers and approximately 400, or 4%, of our salaried workers are represented by labor unions and are covered by collective bargaining agreements. For a discussion of customer concentration, see Note 13, Segment Reporting. Additionally, our future operations may be affected by changes in governmental procurement policies, budget considerations, changing national defense requirements, and global, political, regulatory and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).
Product Warranty Liability
Accrued product warranty and deferred warranty revenue activity is as follows:
 
Nine Months Ended July 31,
(in millions)
2012
 
2011
Balance, at beginning of period
$
598

 
$
506

Costs accrued and revenues deferred
353

 
281

Adjustments to pre-existing warranties(A)(B)
255

 
66

Payments and revenues recognized
(324
)
 
(288
)
Balance at end of period
882

 
565

Less: Current portion
448

 
254

Noncurrent accrued product warranty and deferred warranty revenue
$
434

 
$
311

_________________________
(A)
Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior periods. Such adjustments typically occur when claims experience deviates from historic and expected trends. Our warranty liability is generally affected by component failure rates, repair costs, and the timing of failures. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available. In the first quarter of 2012, we recorded adjustments for changes in estimates of $123 million ($75 million, or $1.07 per diluted share, net of tax). In the second quarter of 2012, we recorded adjustments for changes in estimates of $104 million ($63 million, or $0.92 per diluted share, net of tax). The impacts of income taxes on the adjustments reflect the Company's estimated annual effective tax rate as of July 31, 2012.
(B)
In the third quarter of 2012, we recognized $10 million of adjustments to pre-existing warranties for a specific warranty issue related to component parts from a supplier. Also during the quarter, we reached agreement for reimbursement from such supplier and recognized a recovery for that amount and recorded a receivable within Other current assets.
The amount of deferred revenue related to extended warranty programs was $332 million and $257 million at July 31, 2012 and October 31, 2011, respectively. Revenue recognized under our extended warranty programs was $17 million and $48 million for the three and nine months ended July 31, 2012, respectively, and $13 million and $39 million for the three and nine months ended July 31, 2011, respectively. In the second quarter of 2012, the Truck segment recognized a charge of $24 million related to the extended warranty contracts on our 2010 emission standard MaxxForce Big-Bore engines. The majority of the charge has been included in the adjustments to pre-existing warranties.


10

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Recently Issued and Recently Adopted Accounting Standards
There are no recently issued accounting standards for which the Company expects a material impact on our consolidated financial statements. In addition, for the three months ended July 31, 2012, the Company has not adopted any new accounting guidance that has had a material impact on our consolidated financial statements.
2. Restructurings and Impairments
Restructuring charges recorded are based on restructuring plans that have been committed to by management and are, in part, based upon management's best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities.
Engineering Integration
In the first quarter of 2011, the Company committed to a plan for the consolidation of the truck and engine engineering operations as well as the relocation of our world headquarters. The Company is utilizing proceeds from the October 2010 loan agreement related to the 6.5% Tax Exempt Bonds due 2040 to finance the relocation of the Company’s world headquarters and engineering center, the expansion of an existing warehouse facility, and the development of certain industrial facilities to facilitate the consolidation of certain operations. In the first quarter of 2011, the Company finalized the purchase of the property and buildings for the consolidation of the truck and engine engineering operations, as well as the relocation of our world headquarters. The Company continues to develop plans for efficient transitions related to these activities and the optimization of the operations and management structure.
In the second quarter of 2012, the Company vacated the premises of its former world headquarters in Warrenville, Illinois and recorded a charge of $16 million, consisting of $19 million for the recognition of the fair value of the lease vacancy obligation, partially offset by $3 million for the reversal of deferred rent expense. This charge was recorded in Corporate and recognized in Restructuring charges. The cash payments associated with the lease vacancy obligation are expected to be completed by the end of 2016.
In the first quarter of 2011, the Company committed to a plan to wind-down and transfer certain operations at the Fort Wayne facility. As a result of the restructuring activities, the Truck segment has recognized $34 million of restructuring charges to date, of which $2 million and $5 million was recognized during the three and nine months ended July 31, 2012, respectively, and $4 million and $23 million was recognized during the three and nine months ended July 31, 2011, respectively. To date, the restructuring charges consist of $13 million in personnel costs for employee termination and related benefits, $7 million of charges for pension and other postretirement contractual termination benefits, and $14 million of employee relocation costs.
We anticipate additional engineering integration charges to range between $30 million and $40 million through 2013.
North American Manufacturing Restructuring Activities and Impairments of Intangible Assets
In the third quarter of 2011, the Company committed to plans for the restructuring of certain North American manufacturing operations.
Chatham restructuring activities and impairment of property and equipment
In the third quarter of 2011, the Company committed to close its Chatham, Ontario heavy truck plant, which had been idled since June 2009 due to an inability to reach a collective bargaining agreement with the Canadian Auto Workers ("CAW"). Under the Company's flexible manufacturing strategy, products previously built in Chatham were transitioned to other assembly plants in North America. The commitment to close the plant was also driven by economic, industry, and operational conditions that rendered the plant uncompetitive. As a result of the restructuring activities, the Truck segment has recognized $48 million of restructuring charges since these actions were commenced, substantially all of which were recognized during the third quarter of 2011. Restructuring charges to date consist of $7 million in personnel costs for employee termination and related benefits, $33 million of charges for pension and other postretirement statutory and contractual termination benefits and related charges, and $8 million of other costs. Ultimate pension and postretirement costs and termination benefits are subject to employee negotiation and acceptance rates. We anticipate additional charges of $30 million to $70 million in future periods. We expect the restructuring charges, excluding pension and other postretirement costs, will be paid over the next year.
In the third quarter of 2011, the Truck segment recognized $8 million of charges for impairments of property and equipment at our Chatham facility. The closure of the facility permanently eliminated future cash flows associated with that property and equipment and its carrying values were determined to not be fully recoverable. We utilized the cost approach and market approach to determine the fair value of certain assets within the asset group. The impairment charges reflect the impact of the restructuring activities and closure of the Chatham facility.

11

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Custom Products restructuring activities and impairment of intangible assets
In the third quarter of 2011, the Company committed to a restructuring plan of its Workhorse Custom Chassis ("WCC") and Monaco RV ("Monaco") recreational vehicles operations (collectively "Custom Products"), including the closure of the Union City, Indiana chassis facility and the wind-down and transfer of certain operations at the RV motor coach plant in Coburg, Oregon. In the second quarter of 2012, the Company decided to discontinue accepting orders for its WCC business and take certain actions to idle the business, which are expected to occur in late 2012.
As a result of these restructuring activities relating to Custom Products, the Truck segment has recognized $10 million of restructuring charges to date, of which $5 million was recognized in each of the third and fourth quarters of 2011. To date, the restructuring charges consisted of $6 million in personnel costs for employee termination and related benefits and $4 million of charges due to a curtailment of other postretirement employee benefit plan and postretirement contractual termination benefits. These actions are expected to be completed by the end of 2012. The Company also expects the restructuring charges, excluding other postretirement costs, will be paid over the next two years.
In the third quarter of 2011, the Truck segment recognized $51 million of charges for impairments of intangible assets, primarily customer relationships and trade names, associated with the WCC asset group. The asset group was reviewed for recoverability by comparing the carrying value to estimated future undiscounted cash flows and those carrying values were determined to not be fully recoverable. We utilized the income and market approaches to determine the fair value of the asset group. The impairment charges for the asset group reflected market deterioration and reduction in demand below previously anticipated levels.
As a result of the decision in the second quarter of 2012 to idle the WCC business, the WCC asset group was again reviewed in the second quarter of 2012 for recoverability and determined not to be recoverable. We determined that the remaining intangible asset balances were fully impaired, and the Truck segment recognized asset impairment charges of $28 million. In addition, the Parts segment recognized a charge of $10 million for the impairment of certain intangible assets of the parts distribution operations related to the WCC business.
Other
Springfield Assembly Plant Actions
In the first quarter of 2011, certain employees at our Springfield Assembly Plant accepted retirement and separation incentive agreements. As a result, the Truck segment recorded $4 million of employee termination charges.
Subsequent Event
In August 2012, the Company announced that it is taking actions to control spending across the Company with targeted reductions in certain costs. The Company is focusing on continued reductions of the amount of discretionary spending, including but not limited to reductions from efficiencies, or prioritizing or eliminating certain programs or projects.
These actions included offering to the majority of the Company's U.S.-based non-represented salaried employees the opportunity to apply for a voluntary separation program ("VSP"). Employees who applied and were accepted in the VSP will receive enhanced exit benefits. Along with the employees who chose to participate in the VSP, through the use of attrition and an involuntary reduction in force, the Company will eliminate additional positions in order to meet our targeted reduction goals. Severance benefits of various amounts, depending on the pay and length of service of the affected employees, will be payable under the reduction in force. The Company expects to complete the VSP and involuntary reduction in force in the fourth quarter of 2012 and estimates that it will incur charges between $40 million and $60 million.

12

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Reconciliation of Restructuring Liability
The following table summarizes the activity for the nine months ended July 31, 2012 in the restructuring liability, which excludes pension and other postretirement contractual termination benefits:
(in millions)
Balance at October 31, 2011
 
Additions
 
Payments
 
Adjustments
 
Balance at July 31, 2012
Employee termination charges
$
31

 
$
2

 
$
(8
)
 
$
(4
)
 
$
21

Employee relocation costs

 
6

 
(6
)
 

 

Lease vacancy

 
19

 
(2
)
 
1

 
18

Other
8

 
2

 
(7
)
 
(1
)
 
2

Restructuring liability
$
39

 
$
29

 
$
(23
)
 
$
(4
)
 
$
41

The following table summarizes the activity for the nine months ended July 31, 2011, in the restructuring liability, which excludes pension and other postretirement contractual termination benefits charges, and the pension curtailment:
(in millions)
Balance at
October 31, 2010
 
Additions
 
Payments
 
Adjustments
 
Balance at July 31, 2011
Employee termination charges
$
5

 
$
25

 
$
(4
)
 
$

 
$
26

Employee relocation costs

 
4

 
(4
)
 

 

Other

 
7

 

 

 
7

Restructuring liability
$
5

 
$
36

 
$
(8
)
 
$

 
$
33

3. Finance Receivables
Finance receivables are receivables of our financial services operations, which generally can be repaid without penalty prior to contractual maturity. Finance receivables generally consist of retail and wholesale accounts and retail and wholesale notes. Total finance receivables reported on the Consolidated Balance Sheets are net of an allowance for doubtful accounts. Total on-balance sheet assets of our financial services operations net of intercompany balances are $2.9 billion and $3.5 billion as of July 31, 2012 and October 31, 2011, respectively. Included in total assets are on-balance sheet finance receivables of $2.3 billion and $2.9 billion as of July 31, 2012 and October 31, 2011, respectively. 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.
Our finance receivables by major classification are as follows:
(in millions)
July 31, 2012
 
October 31, 2011
Retail portfolio
$
1,188

 
$
1,613

Wholesale portfolio
1,175

 
1,334

Total finance receivables
2,363

 
2,947

Less: Allowance for doubtful accounts
28

 
34

Total finance receivables, net
2,335

 
2,913

Less: Current portion, net(A)
1,812

 
2,198

Noncurrent portion, net
$
523

 
$
715

_________________________
(A)
The current portion of finance receivables is computed based on contractual maturities. Actual cash collections typically vary from the contractual cash flows because of prepayments, extensions, delinquencies, credit losses, and renewals.
Securitizations
Our Financial Services segment transfers wholesale notes, retail accounts receivable, retail notes, finance leases, and operating leases through special purpose entities ("SPEs"), which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities. In addition to servicing receivables, our continued involvement in the SPEs includes an economic interest in the transferred receivables, and, historically, managing exposure to interest rates using interest rate swaps, interest rate caps, and forward contracts. Some of these transactions may qualify as sales of financial assets and are accounted for off-balance sheet. For sales that do qualify for off-balance sheet treatment, an initial gain (loss) is

13

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

recorded at the time of the sale while servicing fees and excess spread income are recorded as revenue when earned over the life of the finance receivables. For transactions that are accounted for as secured borrowings, we record the interest revenue earned on the finance receivables and the interest expense paid on secured borrowings issued in connection with the finance receivables sold.
There were no transfers of finance receivables that qualified for sale accounting treatment during the three and nine months ended July 31, 2012 and 2011. Securitization income for the three and nine months ended July 31, 2011 relates to the excess spread received and fair value changes on retail accounts sold prior to November 1, 2010. 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.
Our Financial Services segment securitizes wholesale notes through an SPE, which has in place a revolving wholesale note trust ("Master Trust") that provides for funding of eligible wholesale notes. The Master Trust’s assets and liabilities are consolidated into the assets and liabilities of the Company. Components of available wholesale note trust funding facilities were as follows:
(in millions)
Maturity
 
July 31, 2012
 
October 31, 2011
Variable funding notes ("VFN")
October 2012
 
$
500

 
$
500

Investor notes
October 2012
 
350

 
350

Investor notes
October 2013
 
224

 

Investor notes
January 2012
 

 
250

   Total wholesale note funding
 
 
$
1,074

 
$
1,100

Unutilized funding related to the variable funding notes was $320 million and $170 million at July 31, 2012 and October 31, 2011, respectively. For more information on the variable funding notes, see Note 7, Debt, to the accompanying consolidated financial statements.
In November 2011, NFC completed the sale of $224 million of two-year investor notes within the wholesale note trust funding facility.
Our Financial Services segment securitizes eligible retail accounts receivable through Truck Retail Accounts Corporation ("TRAC"), a consolidated SPE. In March 2012, the TRAC funding was renewed with a $125 million facility. The facility is secured by $123 million of retail accounts and $35 million of cash equivalents as of July 31, 2012, as compared to $174 million of retail accounts and $33 million of cash equivalents as of October 31, 2011. There were $85 million and $9 million of unutilized funding at July 31, 2012 and October 31, 2011, respectively. The renewed TRAC funding facility has a maturity date of March 2013.
Finance Revenues
Finance revenues consist of the following:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions)
2012
 
2011
 
2012
 
2011
Retail notes and finance leases revenue
$
24

 
$
32

 
$
76

 
$
108

Operating lease revenue
10

 
8

 
30

 
23

Wholesale notes interest
22

 
25

 
67

 
76

Retail and wholesale accounts interest
8

 
8

 
26

 
20

Securitization income

 

 

 
2

Gross finance revenues
64

 
73

 
199

 
229

Less: Intercompany revenues
22

 
26

 
70

 
75

Finance revenues
$
42

 
$
47

 
$
129

 
$
154


14

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

4. Allowance for Doubtful Accounts
We have two portfolio segments of finance receivables based on the type of financing inherent to each portfolio segment. 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. Each portfolio segment consists 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.
The activity related to our allowance for doubtful accounts for our retail portfolio segment, wholesale portfolio segment, and trade and other receivables is summarized as follows:
 
Three Months Ended July 31, 2012
 
Three Months Ended July 31, 2011
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
26

 
$
2

 
$
17

 
$
45

 
$
40

 
$
2

 
$
34

 
$
76

Provision for doubtful accounts, net of recoveries
1

 

 

 
1

 
(1
)
 

 
(2
)
 
(3
)
Charge-off of accounts(A)
(1
)
 

 
(2
)
 
(3
)
 
(2
)
 

 
(4
)
 
(6
)
Allowance for doubtful accounts, at end of period
$
26

 
$
2

 
$
15

 
$
43

 
$
37

 
$
2

 
$
28

 
$
67

 
Nine Months Ended July 31, 2012
 
Nine Months Ended July 31, 2011
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
31

 
$
2

 
$
17

 
$
50

 
$
58

 
$
2

 
$
36

 
$
96

Provision for doubtful accounts, net of recoveries
(1
)
 

 
2

 
1

 
(1
)
 

 
(4
)
 
(5
)
Charge-off of accounts(A)
(4
)
 

 
(4
)
 
(8
)
 
(20
)
 

 
(4
)
 
(24
)
Allowance for doubtful accounts, at end of period
$
26

 
$
2

 
$
15

 
$
43

 
$
37

 
$
2

 
$
28

 
$
67

_________________________
(A)
We repossess sold and leased vehicles on defaulted finance receivables and leases, and place them into Inventories. Losses recognized at the time of repossession and charged against the allowance for doubtful accounts were $1 million and $4 million for the three and nine months ended July 31, 2012, respectively, and $2 million and $17 million for the three and nine months ended July 31, 2011, respectively.
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.
Information regarding impaired finance receivables is as follows:
 
As of
 
July 31, 2012
 
October 31, 2011
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Impaired finance receivables with specific loss reserves
$
14

 
$

 
$
14

 
$
15

 
$

 
$
15

Impaired finance receivables without specific loss reserves
1

 

 
1

 
2

 

 
2

Specific loss reserves on impaired finance receivables
11

 

 
11

 
10

 

 
10

Finance receivables on non-accrual status
11

 

 
11

 
14

 

 
14

For the impaired finance receivables in the retail portfolio as of July 31, 2012 and 2011, the average balances of those receivables were $13 million and $37 million during the nine months ended July 31, 2012 and 2011, respectively.

15

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

The Company uses the aging of its receivables as well as other inputs when assessing credit quality. The aging analysis for finance receivables is summarized as follows:
 
As of
 
July 31, 2012
 
October 31, 2011
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Current
$
1,116

 
$
1,172

 
$
2,288

 
$
1,515

 
$
1,328

 
$
2,843

30-90 days past due
59

 
2

 
61

 
85

 
5

 
90

Over 90 days past due
13

 
1

 
14

 
13

 
1

 
14

Total finance receivables
$
1,188

 
$
1,175

 
$
2,363

 
$
1,613

 
$
1,334

 
$
2,947

5. Inventories
The components of inventories are as follows:
 
As of
(in millions)
July 31,
2012
 
October 31,
2011
Finished products
$
958

 
$
873

Work in process
203

 
174

Raw materials
716

 
667

Total inventories
$
1,877

 
$
1,714

6. 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 10% to 50%. We do not control these affiliates, but have the ability to exercise significant influence over their operating and financial policies. Our investment in these affiliates is an integral part of our operations, and we account for them using the equity method of accounting.
Prior to the termination of our NC2 Global, LLC ("NC2") joint venture agreement with Caterpillar, our 50% interest in NC2 was included in Investments in non-consolidated affiliates. In September 2011, the Company acquired all of Caterpillar's ownership interest in NC2, thereby increasing our equity interest in NC2 from 50% to 100%. We have consolidated the operating results of NC2 within our Truck segment since September 30, 2011.
Presented below is summarized financial information representing 100% of NC2, which was considered a significant non-consolidated affiliate during the three and nine months ended July 31, 2011, prior to the increase of our equity interest in September 2011. Balance sheet information for NC2 was insignificant to our Consolidated Balance Sheet as of July 31, 2011.
(in millions)
Three Months Ended July 31, 2011
 
Nine Months Ended July 31, 2011
Net revenue
$
82

 
$
161

Net expenses
105

 
218

Loss before tax expense
(23
)
 
(57
)
Net loss
(24
)
 
(58
)

16

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

7. Debt
(in millions)
July 31, 2012
 
October 31,
2011
Manufacturing operations
 
 
 
8.25% Senior Notes, due 2021, net of unamortized discount of $28 and $33, respectively
$
872

 
$
967

3.0% Senior Subordinated Convertible Notes, due 2014, net of unamortized discount of $56 and $73, respectively
514

 
497

Debt of majority-owned dealerships
75

 
94

Financing arrangements and capital lease obligations
146

 
118

Loan Agreement related to 6.5% Tax Exempt Bonds, due 2040
225

 
225

Promissory Note
33

 
40

Asset-Based Credit Facility
238

 

Other
43

 
39

Total manufacturing operations debt
2,146

 
1,980

Less: Current portion
356

 
99

Net long-term manufacturing operations debt
$
1,790

 
$
1,881

Financial Services operations
 
 
 
Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2019
$
1,299

 
$
1,664

Bank revolvers, at fixed and variable rates, due dates from 2013 through 2017
857

 
1,072

Commercial paper, at variable rates, due serially through 2012
53

 
70

Borrowings secured by operating and finance leases, at various rates, due serially through 2017
57

 
70

Total financial services operations debt
2,266

 
2,876

Less: Current portion
1,060

 
1,280

Net long-term financial services operations debt
$
1,206

 
$
1,596

Manufacturing Operations
Term Loan Credit Facility
In August 2012, NIC and Navistar, Inc. signed a definitive credit agreement relating to a senior secured, term loan credit facility in an aggregate principal amount of $1 billion (the "Term Loan Credit Facility"). The maturity date of the Term Loan Credit Facility is July 16, 2014, provided that if, prior to such date, in accordance with the terms of the Company's 3.0% Senior Subordinated Convertible Notes indenture (the "Convertible Notes"), either (i) the Convertible Notes (other than Convertible Notes in an aggregate principal amount not exceeding $100 million) shall have been redeemed or repurchased and canceled or defeased and, pursuant to the terms of the Convertible Notes Indenture, shall have ceased to be outstanding, or (ii) the Company shall have irrevocably deposited with the Trustee (as defined in the Convertible Notes indenture) in trust for payment to the Holders (as defined in the Convertible Notes indenture), or irrevocably delivered to such Holders, as applicable, cash funds and/or (in the case of conversion) shares of Common Stock (as defined in the Convertible Notes indenture) sufficient to pay all amounts due or deliverable on all Convertible Notes (other than Convertible Notes in an aggregate principal amount not exceeding $100 million), in which case the Term Loan Credit Facility will mature on August 17, 2017.
The Term Loan Credit Facility is secured by a first priority security interest in certain assets of NIC, Navistar, Inc., and fifteen of its direct and indirect subsidiaries, and contains customary provisions for financings of this type, including, without limitation, representations and warranties, affirmative and negative covenants and events of default. Generally, if an event of default occurs and is not cured within any specified grace period, the administrative agent, at the request of (or with the consent of) the lenders holding not less than a majority in principal amount of the outstanding term loans, may declare the term loan to be due and payable immediately. Borrowings under the Term Loan Credit Facility accrue interest at a rate equal to a base rate plus a spread of 450 basis points or a Eurodollar rate plus a spread of 550 basis points with a LIBOR floor of 150 basis points.

17

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

In August 2012, Navistar, Inc. borrowed an aggregate principal amount of $1 billion under the Term Loan Credit Facility. A portion of the proceeds were used to repay all outstanding loans under Navistar, Inc.'s existing five-year inventory secured, asset-based revolving senior line of credit facility entered into in October 2011 (the "Asset-Based Credit Facility") and to pay certain fees and expenses incurred in connection with the Term Loan Credit Facility. The Term Loan Credit Facility agreement requires quarterly amortization payments of $2.5 million, with the balance due at maturity.
Amended Asset-Based Credit Facility
In October 2011, Navistar, Inc. and various other U.S. subsidiaries signed a definitive loan agreement relating to the Asset-Based Credit Facility, containing an aggregate principal amount of $355 million. In November 2011, the Company borrowed $100 million under the Asset-Based Credit Facility and, in June 2012, borrowed an additional $138 million. In August 2012, in conjunction with the Company's Term Loan Credit Facility transaction, we used a portion of the proceeds from the Term Loan Credit Facility to repay all of the borrowings under the Asset-Based Credit Facility and Navistar, Inc. entered into an amended and restated asset-based credit agreement in an aggregate principal amount of $175 million (the "Amended Asset-Based Credit Facility") providing for a term of up to four years and nine months. Following the amendment and restatement of the Asset-Based Credit Facility, each of the subsidiaries was released from its obligations under the Asset-Based Credit Facility. The Amended Asset-Based Credit Facility is secured by a first priority security interest in Navistar, Inc's aftermarket parts inventory that is stored at certain parts distribution centers, storage facilities and third party processor or logistics provider locations. The Amended Asset-Based Credit Facility contains customary provisions for financings of this type, including, without limitation, representations and warranties, affirmative and negative covenants and events of default. All borrowings under the Amended Asset-Based Credit Facility accrue interest at a rate equal to a base rate or an adjusted LIBOR rate plus a spread. The spread, which will be based on an availability-based measure, ranges from 175 basis points to 225 basis points for Base Rate borrowings and 275 basis points to 325 basis points for LIBOR borrowings. The initial LIBOR spread is 275 basis points.
Senior Notes
The Company's 8.25% Senior Notes, due in 2021 (the "Senior Notes") contain an optional redemption feature allowing the Company not more than once during each twelve-month period ending on November 1, 2010, 2011, 2012, 2013, and 2014, to redeem up to $50 million in principal amount of the Senior Notes, at a redemption price equal to 103% of the principal amount of the Senior Notes redeemed, plus accrued and unpaid interest, if any. The Company exercised this early redemption feature for a total principal amount of $100 million, by redeeming $50 million of Senior Notes on November 1, 2011 and an additional $50 million of Senior Notes on November 2, 2011. In the first quarter of 2012, the Company recorded $8 million of charges, relating to the early redemption premium and write-off of related discount and debt issuance costs.
Other
In January 2012, the Company began leasing an existing manufacturing facility in Cherokee, Alabama and purchased certain machinery and equipment within that facility. In relation to the machinery and equipment, the Company entered into a $40 million promissory note with the lessor. This amount is payable in monthly installments over a ten-year term, in conjunction with the lease of the facility. The Company recorded the machinery and equipment, and the associated liability, at the relative fair value of $58 million. Accordingly, this arrangement is included within our financing arrangements and capital lease obligations.
Financial Services Operations
In August 2012, our Mexican financial services affiliate Navistar Financial, S.A. de C.V., SOFOM, E.N.R., signed an agreement for a five-year, $95 million funding facility, which will be used to support trade receivables for the sale of our trucks and buses manufactured in Mexico and exported to Columbian dealers.
In July 2012, NFC extended the maturity date of its $500 million dealer floor plan VFN facility from July 2012 to October 2012. In August 2012, the VFN facility was renewed for $750 million with a maturity date of August 2013.
In June 2012, NFC issued $502 million of borrowings secured by retail asset-backed securities that matures in January 2019. Proceeds were used to settle the borrowings secured by retail asset-backed securities of $372 million issued in May 2012, and to settle a portion of NFC's bank credit facility revolving line of credit.
In December 2011, NFC refinanced its bank credit facility dated December 2009, as amended, with a five-year $840 million facility consisting of a $340 million term loan and a $500 million revolving line of credit. The new facility is subject to customary operational and financial covenants. Quarterly principal payments on the term portion are $4 million for the first eight quarters and $9 million for the next eleven quarters, with the balance due at maturity.

18

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

8. Postretirement Benefits
Defined Benefit Plans
We provide postretirement benefits to a substantial portion of our employees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, and surviving spouses and dependents. Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. For the three and nine months ended July 31, 2012, we contributed $30 million and $112 million, respectively, and for the three and nine months ended July 31, 2011, we contributed $28 million and $80 million, respectively, to our pension plans to meet regulatory funding requirements. In July 2012, the Moving Ahead for Progress in the 21st Century Act ("MAP-21 Act") was signed into law. The MAP-21 Act legislation impacts minimum funding requirements for pension plans, but does not otherwise impact our accounting for pension benefits. As a result of the MAP-21 Act, we lowered our funding expectations. We currently anticipate additional contributions of $45 million to our pension plans during the remainder of 2012.
We primarily fund other post-employment benefit ("OPEB") obligations, such as retiree medical, in accordance with a 1993 Settlement Agreement (the "1993 Settlement Agreement"), which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base Trust"). That 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of the Company's then applicable retiree health care and life insurance benefits. Contributions for the nine months ended July 31, 2012 and 2011 were $2 million and $1 million, respectively, and we anticipate contributions for the remainder of 2012 to be $17 million.
The Early Retiree Reinsurance Program ("ERRP") was created under the Patient Protection and Affordable Care Act ("PPACA") of 2010 to provide temporary financial assistance to health plan sponsors who provide retirement health coverage to pre-Medicare retirees. Under the terms of ERRP, for the nine months ended July 31, 2012 and 2011, $3 million and $5 million, respectively, was collected and deposited into the Base Trust. In the three months ended July 31, 2012 and 2011, no amounts were collected or deposited into the Base Trust.
During the third quarter of 2011, the Company committed to close its Chatham, Ontario plant. The plant closure resulted in a pension curtailment gain of $8 million that was recognized as a component of Accumulated other comprehensive loss and contractual termination charges of $35 million. The closure also resulted in an OPEB charge of $13 million during the third quarter of 2011 representing a plan curtailment and related contractual termination benefits. For more information regarding restructuring activities and the closure of the Chatham, Ontario plant, see Note 2, Restructurings and Impairments.
The Company also incurred an OPEB charge of $4 million during the third quarter of 2011 due to an OPEB plan curtailment and contractual termination charges related to the closure of the WCC Union City plant. For more information regarding restructuring activities at the WCC Union City plant, see Note 2, Restructurings and Impairments.
During the first quarter of 2011, the Company incurred a charge of $5 million due to a plan curtailment and contractual termination benefits related to restructuring activities at the Fort Wayne facility. For more information regarding restructuring activities at the Fort Wayne facility, see Note 2, Restructurings and Impairments.

19

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Components of Net Periodic Benefit Expense
Net postretirement benefits expense included in our Consolidated Statements of Operations is comprised of the following:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
Pension
Benefits
 
Health and
Life Insurance
Benefits
 
Pension
Benefits
 
Health and
Life Insurance
Benefits
(in millions)
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost for benefits earned during the period
$
5

 
$
4

 
$
1

 
$
2

 
$
13

 
$
13

 
$
5

 
$
6

Interest on obligation
43

 
47

 
20

 
13

 
129

 
141

 
62

 
40

Amortization of cumulative loss
27

 
25

 
10

 

 
82

 
75

 
30

 

Amortization of prior service benefit
1

 
1

 
(2
)
 
(7
)
 
1

 
1

 
(4
)
 
(22
)
Settlements and curtailments

 

 

 
11

 

 
2

 

 
11

Contractual termination benefits

 
35

 

 
6

 

 
38

 
(3
)
 
6

Premiums on pension insurance

 

 

 

 
1

 
1

 

 

Expected return on assets
(49
)
 
(53
)
 
(8
)
 
(10
)
 
(145
)
 
(158
)
 
(26
)
 
(31
)
Net postretirement benefits expense
$
27

 
$
59

 
$
21

 
$
15

 
$
81

 
$
113

 
$
64

 
$
10

Defined Contribution Plans and Other Contractual Arrangements
Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the Company. Many participants covered by the plan receive annual Company contributions to their retirement accounts based on an age-weighted percentage of the participant's eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $8 million and $32 million for the three and nine months ended July 31, 2012 respectively, and $7 million and $25 million for the three and nine months ended July 31, 2011, respectively.
In accordance with the 1993 Settlement Agreement, an independent Retiree Supplemental Benefit Trust (the "Supplemental Trust") was established. The Supplemental Trust, and the benefits it provides to certain retirees, is not part of the Company's consolidated financial statements. The assets of the Supplemental Trust arise from three sources: (i) the Company's 1993 contribution to the Supplemental Trust of 25.5 million shares of our Class B common stock, which were subsequently sold by the Supplemental Trust prior to 2000, (ii) contingent profit-sharing contributions made by the Company, and (iii) net investment gains on the Supplemental Trust's assets, if any.
The Company's contingent profit sharing obligations will continue until certain funding targets defined by the 1993 Settlement Agreement are met ("Profit Sharing Cessation"). Upon Profit Sharing Cessation, the Company would assume responsibility for (i) establishing the investment policy for the Supplemental Trust, (ii) approving or disapproving of certain additional supplemental benefits to the extent such benefits would result in higher expenditures than those contemplated upon the Profit Sharing Cessation, and (iii) making additional contributions to the Supplemental Trust as necessary to make up for investment and / or actuarial losses. We have recorded no profit sharing accruals based on our estimate of 2012 results.
9. Income Taxes
We compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense. Certain foreign results in 2012 and 2011 are excluded from ordinary income due to ordinary losses for which no benefit can be recognized. Ordinary income refers to income (loss) before income tax expense excluding significant unusual or infrequently occurring items. Our effective tax rate in the first nine months of 2012 was higher than the U.S. statutory rate due to the impact of changes in valuation allowances related to our Canadian deferred tax assets, the geographical mix of the jurisdictions recognizing earnings or losses, and the favorable results from uncertain tax positions. Our effective tax rate for the third quarter of 2012 was higher than the U.S. statutory rate due to $173 million of income tax benefit resulting from a third quarter change in the estimated 2012 annual effective tax rate, resulting from a significant change in the 2012 forecasted results, which was caused by a change in the geographical mix of the jurisdictions in which we recognize earnings or losses, and the favorable results from uncertain tax positions. The tax effect of a significant unusual or infrequently occurring item is recorded in the interim period in which it occurs. Items included in income tax expense in the periods in which they occur include the tax effects of material restructurings and impairments, cumulative effect of changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment regarding the ability to realize deferred tax assets in future years.
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. This evaluation resulted in the determination that we would be unable to realize a portion of our U.S. research and development credits and a valuation allowance of $14 million was, therefore, established as of July 31, 2012. We continue to maintain a valuation allowance on certain federal, state, and foreign deferred tax assets that we believe on a more-likely-than-not basis will not be realized based on current forecasted results. Based on our current domestic performance, as well as the risks associated with our strategy for meeting 2010 EPA emission standards, we also believe that it is reasonably possible that a significant additional U.S. deferred tax assets valuation allowance could be required in the next twelve months. Future events that may contribute to the need to establish an additional U.S. deferred tax asset valuation allowance include, but are not limited to: (i) continued deterioration of our domestic performance, (ii) significant warranty charges, and (iii) adverse developments with respect to our strategy for meeting 2010 EPA emission standards. For additional discussion on risks associated with our strategy for meeting 2010 EPA emission standards see section Meeting U.S. Federal and State 2010 Emission Standards Requirements of Note 12, Commitments and Contingencies.
During the second quarter 2012, our evaluation resulted in the determination that a significant portion of our valuation allowance on our Canadian deferred tax assets could be released. As a result of our analysis, we recognized an income tax benefit of $181 million from the release of valuation allowances in the nine months ended July 31, 2012.
Similarly, during the third quarter of 2011, we conducted an evaluation and determined that a significant portion of our valuation allowance on our U.S. deferred tax assets could be released as of July 31, 2011. As a result, we recognized an income tax benefit of $1.5 billion and an adjustment to Additional paid in capital of $45 million for the release of the valuation allowances on our U.S. deferred tax assets during the three months ended July 31, 2011.
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 financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of July 31, 2012, the amount of liability for uncertain tax positions was $14 million. If the unrecognized tax benefits are recognized, $6 million would impact our effective tax rate.
We recognize interest and penalties related to uncertain tax positions as part of Income tax benefit. For the three and nine months ended July 31, 2012, the tax benefit includes interest and penalties related to our uncertain tax positions of an expense of $2 million and a benefit of $9 million, respectively, reflecting the ongoing resolution of audits in various jurisdictions. We have open tax years back to 2005 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. Interim tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns, although actual results may differ. The liability for unrecognized tax benefits may increase or decrease during the next twelve months. The impact of any such change on our financial condition and results of operation could be in the range of $0 to $25 million. We do not expect any such change to have a material effect on our cash flows.
10. 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.

20

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

The following section describes key inputs and assumptions in our valuation methodologies:
Cash Equivalents and Restricted Cash Equivalents—We classify highly liquid investments, with a maturity of 90 days or less at the date of purchase, including U.S. Treasury bills, federal agency securities, and commercial paper, as cash equivalents. The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents approximate fair value because of the short-term maturity and highly liquid nature of these instruments.
Marketable Securities—Our marketable securities portfolios are classified as available-for-sale and primarily include investments in U.S. government and commercial paper with a maturity of greater than 90 days at the date of purchase. We use quoted prices from active markets to determine 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. In certain cases, market data is not available and we estimate inputs such as in situations where trading in a particular commodity is not active. Measurements based upon these unobservable inputs are classified within Level 3. For more information regarding derivatives, see Note 11, Financial Instruments and Commodity Contracts.
Retained Interests—We retain certain interests in receivables sold in off-balance sheet securitization transactions prior to November 1, 2010. We estimate the fair value of retained interests using internal valuation models that incorporate market inputs and our own assumptions about future cash flows. The fair value of retained interests is estimated based on the present value of monthly collections on the sold finance receivables in excess of amounts accruing to investors and other obligations arising in securitization transactions. In addition to the amount of debt and collateral held by the securitization vehicle, the three key inputs that affect the valuation of the retained interests include credit losses, payment speed, and the discount rate. We classify these assets within Level 3.
Guarantees—We provide certain guarantees of payments and residual values to specific counterparties. Fair value of these guarantees is based upon internally developed models that utilize current market-based assumptions and historical data. We classify these liabilities within Level 3. For more information regarding guarantees, see Note 12, Commitments and Contingencies.
The following tables present the financial instruments measured at fair value on a recurring basis:
 
As of July 31, 2012
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
U.S. Treasury bills
$
139

 
$

 
$

 
$
139

Other U.S. and non-U.S. government bonds

 

 

 

Other
20

 

 

 
20

Derivative financial instruments:
 
 
 
 
 
 
 
Foreign currency contracts

 
1

 

 
1

Commodity contracts

 

 

 

Total assets
$
159

 
$
1

 
$

 
$
160

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
2

 
$

 
$
2

Commodity contracts

 
6

 

 
6

Guarantees

 

 
7

 
7

Total liabilities
$

 
$
8

 
$
7

 
$
15


21

Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

 
As of October 31, 2011
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
U.S. Treasury bills
$
283

 
$

 
$

 
$
283

Other U.S and non-U.S. government bonds
415

 

 

 
415

Other
20

 

 

 
20

Derivative financial instruments:
 
 
 
 
 
 
 
Commodity contracts

 

 
1

 
1

Foreign currency contracts

 
3

 

 
3

Total assets
$
718

 
$
3

 
$
1

 
$
722

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
Commodity contracts
$

 
$
3

 
$
3

 
$
6

Cross currency swaps

 
4

 

 
4

Guarantees

 

 
6

 
6

Total liabilities
$

 
$
7

 
$
9

 
$
16

The tables below present the changes for those financial instruments classified within Level 3 of the valuation hierarchy:
 
2012
 
2011
(in millions)
Guarantees
 
Retained interests
 
Commodity contracts
 
Guarantees
 
Retained interests
 
Commodity contracts
Three Months Ended July 31
 
 
 
 
 
 
 
 
 
 
 
Balance at May 1
$
7

 
$

 
$

 
$

 
$

 
$
6

Total losses (realized/unrealized) included in earnings (A)

 

 

 

 

 
(1
)
Settlements

 

 

 

 

 
(3
)
Balance at July 31
$
7

 
$

 
$

 
$

 
$

 
$
2

Change in unrealized gains on assets and liabilities still held
$

 
$

 
$

 
$

 
$

 
$
2

Nine Months Ended July 31
 
 
 
 
 
 
 
 
 
 
 
Balance at November 1
$
6

 
$

 
$
(2
)
 
$

 
$
53

 
$
2

Total gains (losses) (realized/unrealized) included in earnings (A)

 

 
(1
)
 

 
1

 
5

Transfers into Level 3

 

 

 

 

 

Transfers out of Level 3

 

 
2

 

 

 

Issuances
1

 

 

 

 

 

Settlements

 

 
1

 

 
(54
)
 
(5
)
Balance at July 31
$
7

 
$

 
$