Navistar Reports Third Quarter 2017 Results

SEGMENT REVIEW

Summary of Financial Results:

Three Months Ended
July 31,

Nine Months Ended
July 31,

(in millions, except per share data)

2017

2016

2017

2016

Sales and revenues, net

$

2,213

$

2,086

$

5,972

$

6,048

Segment Results:

Truck

$

7

$

(54)

$

(118)

$

(128)

Parts

157

152

459

478

Global Operations

3

(5)

(8)

(19)

Financial Services

23

26

51

77

Income (loss) from continuing operations, net of tax^(A)

$

36

(34)

$

(106)

$

(63)

Net income (loss)^(A)

37

(34)

(105)

(63)

Diluted income (loss) per share from continuing operations^(A)

$

0.37

$

(0.42)

$

(1.16)

$

(0.77)

Diluted income (loss) per share^(A)

$

0.38

$

(0.42)

$

(1.15)

$

(0.77)

(A)

  Amounts attributable to Navistar International Corporation.

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)

2017

2016

2017

2016

Sales and revenues

Sales of manufactured products, net

$

2,178

$

2,052

$

5,870

$

5,946

Finance revenues

35

34

102

102

Sales and revenues, net

2,213

2,086

5,972

6,048

Costs and expenses

Costs of products sold

1,803

1,757

4,949

5,068

Restructuring charges

(13)

5

(4)

11

Asset impairment charges

6

12

13

17

Selling, general and administrative expenses

233

197

654

604

Engineering and product development costs

61

62

189

181

Interest expense

91

84

262

246

Other income, net

(8)

(15)

(7)

(62)

Total costs and expenses

2,173

2,102

6,056

6,065

Equity in income of non-consolidated affiliates

1

2

6

3

Income (loss) from continuing operations before income taxes

41

(14)

(78)

(14)

Income tax expense

—

(14)

(10)

(25)

Income (loss) from continuing operations

41

(28)

(88)

(39)

Income from discontinued operations, net of tax

1

—

1

—

Net income (loss)

42

(28)

(87)

(39)

Less: Net income attributable to non-controlling interests

5

6

18

24

Net income (loss) attributable to Navistar International Corporation

$

37

$

(34)

$

(105)

$

(63)

Amounts attributable to Navistar International Corporation common shareholders:

Income (loss) from continuing operations, net of tax

$

36

$

(34)

$

(106)

$

(63)

Income from discontinued operations, net of tax

1

—

1

—

Net income (loss)

$

37

$

(34)

$

(105)

$

(63)

Income (loss) per share:

Basic:

Continuing operations

$

0.37

$

(0.42)

$

(1.16)

$

(0.77)

Discontinued operations

0.01

—

0.01

—

$

0.38

$

(0.42)

$

(1.15)

$

(0.77)

Diluted:

Continuing operations

$

0.37

$

(0.42)

$

(1.16)

$

(0.77)

Discontinued operations

0.01

—

0.01

—

$

0.38

$

(0.42)

$

(1.15)

$

(0.77)

Weighted average shares outstanding:

Basic

98.3

81.7

91.1

81.7

Diluted

98.6

81.7

91.1

81.7

Navistar International Corporation and Subsidiaries

Consolidated Balance Sheets

July 31,

October 31,

(in millions, except per share data)

2017

2016

ASSETS

(Unaudited)

Current assets

Cash and cash equivalents

$

911

$

804

Restricted cash and cash equivalents

81

64

Marketable securities

62

46

Trade and other receivables, net

311

276

Finance receivables, net

1,557

1,457

Inventories, net

979

944

Other current assets

181

168

Total current assets

4,082

3,759

Restricted cash

56

48

Trade and other receivables, net

18

16

Finance receivables, net

231

220

Investments in non-consolidated affiliates

55

53

Property and equipment (net of accumulated depreciation and amortization of $2,500 and $2,553, respectively)

1,333

1,241

Goodwill

38

38

Intangible assets (net of accumulated amortization of $133 and $124, respectively)

44

53

Deferred taxes, net

141

161

Other noncurrent assets

82

64

Total assets

$

6,080

$

5,653

LIABILITIES and STOCKHOLDERS' DEFICIT

Liabilities

Current liabilities

Notes payable and current maturities of long-term debt

$

965

$

907

Accounts payable

1,213

1,113

Other current liabilities

1,137

1,183

Total current liabilities

3,315

3,203

Long-term debt

4,255

3,997

Postretirement benefits liabilities

2,747

3,023

Other noncurrent liabilities

686

723

Total liabilities

11,003

10,946

Stockholders' deficit

Series D convertible junior preference stock

2

2

Common stock (103.1 and 86.8 shares issued, respectively, and $0.10 par value per share and 220 shares authorized at both dates)

10

9

Additional paid-in capital

2,733

2,499

Accumulated deficit

(5,068)

(4,963)

Accumulated other comprehensive loss

(2,412)

(2,640)

Common stock held in treasury, at cost (4.9 and 5.2 shares, respectively)

(190)

(205)

Total stockholders' deficit attributable to Navistar International Corporation

(4,925)

(5,298)

Stockholders' equity attributable to non-controlling interests

2

5

Total stockholders' deficit

(4,923)

(5,293)

Total liabilities and stockholders' deficit

$

6,080

$

5,653

Navistar International Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended
July 31,

(in millions)

2017

2016

Cash flows from operating activities

Net loss

$

(87)

$

(39)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

113

111

Depreciation of equipment leased to others

56

53

Deferred taxes, including change in valuation allowance

(16)

—

Asset impairment charges

13

17

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

(5)

2

Amortization of debt issuance costs and discount

36

27

Stock-based compensation

19

9

Provision for doubtful accounts, net of recoveries

9

9

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

1

5

Write-off of debt issuance cost and discount

4

—

Other non-cash operating activities

(21)

(12)

Changes in other assets and liabilities, exclusive of the effects of businesses disposed

(290)

(196)

Net cash used in operating activities

(168)

(14)

Cash flows from investing activities

Purchases of marketable securities

(619)

(378)

Sales of marketable securities

586

358

Maturities of marketable securities

17

39

Net change in restricted cash and cash equivalents

(25)

(64)

Capital expenditures

(93)

(83)

Purchases of equipment leased to others

(96)

(94)

Proceeds from sales of property and equipment

32

20

Investments in non-consolidated affiliates

(2)

(1)

Proceeds from sales of affiliates

6

36

Net cash used in investing activities

(194)

(167)

Cash flows from financing activities

Proceeds from issuance of securitized debt

278

72

Principal payments on securitized debt

(326)

(69)

Net change in secured revolving credit facilities

119

26

Proceeds from issuance of non-securitized debt

491

163

Principal payments on non-securitized debt

(368)

(235)

Net change in notes and debt outstanding under revolving credit facilities

23

(151)

Principal payments under financing arrangements and capital lease obligations

(1)

(1)

Debt issuance costs

(22)

(12)

Proceeds from financed lease obligations

49

17

Issuance of common stock

256

—

Stock issuance costs

(11)

—

Proceeds from exercise of stock options

4

—

Dividends paid by subsidiaries to non-controlling interest

(21)

(28)

Other financing activities

(3)

1

Net cash provided by (used in) financing activities

468

(217)

Effect of exchange rate changes on cash and cash equivalents

1

33

Increase (decrease) in cash and cash equivalents

107

(365)

Cash and cash equivalents at beginning of the period

804

912

Cash and cash equivalents at end of the period

$

911

$

547

Navistar International Corporation and Subsidiaries

Segment Reporting

(Unaudited)

We define segment profit (loss) as net income (loss) from continuing operations attributable to Navistar International Corporation, excluding income tax expense. The following tables present selected financial information for our reporting segments:

(in millions)

Truck

Parts

Global
Operations

Financial
Services^(A)

Corporate
and
Eliminations

Total

Three Months Ended July 31, 2017

External sales and revenues, net

$

1,521

$

580

$

74

$

35

$

3

$

2,213

Intersegment sales and revenues

10

6

10

27

(53)

—

Total sales and revenues, net

$

1,531

$

586

$

84

$

62

$

(50)

$

2,213

Income (loss) from continuing operations attributable to NIC, net of tax

$

7

$

157

$

3

$

23

$

(154)

$

36

Income tax expense

—

—

—

—

—

—

Segment profit (loss)

$

7

$

157

$

3

$

23

$

(154)

$

36

Depreciation and amortization

$

35

$

3

$

3

$

13

$

3

$

57

Interest expense

—

—

—

24

67

91

Equity in income (loss) of non-consolidated affiliates

1

1

(1)

—

—

1

Capital expenditures^(B)

21

1

2

—

3

27

(in millions)

Truck

Parts

Global
Operations

Financial
Services^(A)

Corporate
and
Eliminations

Total

Three Months Ended July 31, 2016

External sales and revenues, net

$

1,386

$

589

$

73

$

34

$

4

$

2,086

Intersegment sales and revenues

9

8

12

26

(55)

—

Total sales and revenues, net

$

1,395

$

597

$

85

$

60

$

(51)

$

2,086

Income (loss) from continuing operations attributable to NIC, net of tax

$

(54)

$

152

$

(5)

$

26

$

(153)

$

(34)

Income tax expense

—

—

—

—

(14)

(14)

Segment profit (loss)

$

(54)

$

152

$

(5)

$

26

$

(139)

$

(20)

Depreciation and amortization

$

29

$

3

$

4

$

13

$

4

$

53

Interest expense

—

—

—

21

63

84

Equity in income of non-consolidated affiliates

1

1

—

—

—

2

       Capital expenditures^(B)

26

—

—

1

3

30

(in millions)

Truck

Parts

Global
Operations

Financial
Services^(A)

Corporate
and
Eliminations

Total

Nine Months Ended July 31, 2017

External sales and revenues, net

$

3,929

$

1,747

$

186

$

102

$

8

$

5,972

Intersegment sales and revenues

27

19

18

70

(134)

—

Total sales and revenues, net

$

3,956

$

1,766

$

204

$

172

$

(126)

$

5,972

Income (loss) from continuing operations attributable to NIC, net of tax

$

(118)

$

459

$

(8)

$

51

$

(490)

$

(106)

Income tax expense

—

—

—

—

(10)

(10)

Segment profit (loss)

$

(118)

$

459

$

(8)

$

51

$

(480)

$

(96)

Depreciation and amortization

$

103

$

9

$

10

$

38

$

9

$

169

Interest expense

—

—

—

65

197

262

Equity in income of non-consolidated affiliates

3

3

—

—

—

6

       Capital expenditures^(B)

78

2

5

1

7

93

(in millions)

Truck

Parts

Global
Operations

Financial
Services^(A)

Corporate
and
Eliminations

Total

Nine Months Ended July 31, 2016

External sales and revenues, net

$

3,926

$

1,791

$

221

$

102

$

8

$

6,048

Intersegment sales and revenues

81

23

33

75

(212)

—

Total sales and revenues, net

$

4,007

$

1,814

$

254

$

177

$

(204)

$

6,048

Income (loss) from continuing operations attributable to NIC, net of tax

$

(128)

$

478

$

(19)

$

77

$

(471)

$

(63)

Income tax expense

—

—

—

—

(25)

(25)

Segment profit (loss)

$

(128)

$

478

$

(19)

$

77

$

(446)

$

(38)

Depreciation and amortization

$

92

$

10

$

13

$

37

$

12

$

164

Interest expense

—

—

—

59

187

246

Equity in income (loss) of non-consolidated affiliates

3

3

(3)

—

—

3

       Capital expenditures^(B)

70

2

2

1

8

83

(in millions)

Truck

Parts

Global Operations

Financial

Services

Corporate

and

Eliminations

Total

Segment assets, as of:

July 31, 2017

$

1,736

$

602

$

374

$

2,237

$

1,131

$

6,080

October 31, 2016

1,520

594

407

2,116

1,016

5,653

Total sales and revenues in the Financial Services segment include interest revenues of $45 million and $121 million for the three and nine months ended July 31, 2017, respectively, and $43 million and $127 million for the three and nine months ended July 31, 2016, respectively.

Exclusive of purchases of equipment leased to others.

EBITDA reconciliation:

Three Months
Ended July 31,

Nine Months
Ended July 31,

(in millions)

2017

2016

2017

2016

Income (loss) from continuing operations attributable to NIC, net of tax

$

36

$

(34)

$

(106)

$

(63)

Plus:

Depreciation and amortization expense

57

53

169

164

Manufacturing interest expense^(A)

67

63

197

187

Less:

Income tax expense

—

(14)

(10)

(25)

EBITDA

$

160

$

96

$

270

$

313

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:

Three Months
Ended July 31,

Nine Months
Ended July 31,

(in millions)

2017

2016

2017

2016

Interest expense

$

91

$

84

$

262

$

246

Less:  Financial services interest expense

24

21

65

59

Manufacturing interest expense

$

67

$

63

$

197

$

187

Adjusted EBITDA Reconciliation:

Three Months
Ended July 31,

Nine Months
Ended July 31,

(in millions)

2017

2016

2017

2016

EBITDA (reconciled above)

$

160

$

96

$

270

$

313

Less significant items of:

Adjustments to pre-existing warranties^(A)

6

19

(4)

70

Asset impairment charges^(B)

6

12

13

17

Restructuring of North American manufacturing operations^(C)

(3)

—

6

—

Cost reduction and other strategic initiatives

—

5

—

11

EGR product litigation^(D)

31

—

31

—

Gain on sale^(E)

(6)

—

(6)

—

Debt refinancing charges^(F)

—

—

4

—

One-time fee^(G)

—

—

—

(15)

Total adjustments

34

36

44

83

Adjusted EBITDA

$

194

$

132

$

314

$

396

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.

(B)

In the third quarter and first nine months of 2017, we recorded $6 million and $13 million, respectively, of asset impairment charges in our Truck segment relating to assets held for the sale of our Conway, Arkansas fabrication business and for certain assets under operating leases. In the third quarter and first nine months of 2016, we recorded $11 million and $16 million, respectively, of asset impairment charges related to certain long lived assets in our Truck segment. In the third quarter of 2016, we recorded $1 million of asset impairment charges related to certain intangible assets in our Global operations segment.

(C)

In the third quarter and first nine months of 2017, we recorded a benefit of $3 million and charges of $6 million for restructuring in our Truck segment. In the third quarter of 2017, we recorded $41 million of charges related to the cessation of production at our Melrose Park Facility and a net benefit of $43 million related to the execution of the closing agreement for our Chatham, Ontario plant which were recognized in Restructuring Charges and Costs of Products Sold. The first nine months of 2017 were also impacted by $7 million of restructuring charges related to the closure of the Chatham, Ontario plant and $2 million of Corporate restructuring charges.

(D)

In the third quarter of 2017, we recognized a charge of $31 million for a jury verdict related to Maxxforce engine EGR litigation in our Truck segment.

(E)

In the third quarter of 2017, we recognized a gain of $6 million related to the sale of a business line in our Parts segment.

(F)

In the second quarter of 2017, we recorded a charge of $4 million related to third party fees and debt issuance costs associated with the repricing of our Term Loan.

(G)

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

Manufacturing segment cash, cash equivalents, and marketable securities reconciliation:

As of July 31, 2017

(in millions)

Manufacturing
Operations

Financial
Services
Operations

Consolidated
Balance Sheet

Assets

Cash and cash equivalents

$

868

$

43

$

911

Marketable securities

55

7

62

Total cash, cash equivalents, and marketable securities

$

923

$

50

$

973