Navistar Reports Third Quarter 2019 Results

SEGMENT REVIEW

Summary of Financial Results:

(Unaudited)

Three Months Ended
July 31,

Nine Months Ended
July 31,

(in millions, except per share data)

2019

2018

2019

2018

Sales and revenues, net

$

3,042

$

2,606

$

8,471

$

6,933

Segment Results:

Truck

$

167

$

165

$

183

$

200

Parts

149

144

437

413

Global Operations

1

4

10

(2)

Financial Services

30

23

93

62

Net income^(A)

156

170

119

152

Diluted income per share^(A)

1.56

1.71

1.20

1.53

(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)

2019

2018

2019

2018

Sales and revenues

Sales of manufactured products, net

$

2,996

$

2,566

$

8,330

$

6,815

Finance revenues

46

40

141

118

Sales and revenues, net

3,042

2,606

8,471

6,933

Costs and expenses

Costs of products sold

2,501

2,096

6,973

5,615

Restructuring charges

—

1

1

(1)

Asset impairment charges

3

8

6

11

Selling, general and administrative expenses

167

222

726

613

Engineering and product development costs

81

72

242

222

Interest expense

76

82

243

240

Other expense (income), net

25

(55)

140

36

Total costs and expenses

2,853

2,426

8,331

6,736

Equity in income of non-consolidated affiliates

1

—

4

—

Income before income tax

190

180

144

197

Income tax expense

(29)

(3)

(9)

(25)

Net income

161

177

135

172

Less: Net income attributable to non-controlling interests

5

7

16

20

Net income attributable to Navistar International Corporation

$

156

$

170

$

119

$

152

Income per share attributable to Navistar International Corporation:

Basic

$

1.57

$

1.72

$

1.20

$

1.54

Diluted

1.56

1.71

1.20

1.53

Weighted average shares outstanding:

Basic

99.4

99.0

99.2

98.8

Diluted

99.7

99.7

99.5

99.6

Navistar International Corporation and Subsidiaries

Consolidated Balance Sheets

As of
July 31,
2019

As of
October 31,
2018

(in millions, except per share data)

ASSETS

(Unaudited)

Current assets

Cash and cash equivalents

$

1,160

$

1,320

Restricted cash and cash equivalents

79

62

Marketable securities

3

101

Trade and other receivables, net

429

456

Finance receivables, net

2,187

1,898

Inventories, net

1,195

1,110

Other current assets

273

189

Total current assets

5,326

5,136

Restricted cash

57

63

Trade and other receivables, net

12

49

Finance receivables, net

275

260

Investments in non-consolidated affiliates

33

50

Property and equipment (net of accumulated depreciation and amortization of $2,463 and $2,498, respectively)

1,290

1,370

Goodwill

38

38

Intangible assets (net of accumulated amortization of $142 and $140, respectively)

27

30

Deferred taxes, net

124

121

Other noncurrent assets

112

113

Total assets

$

7,294

$

7,230

LIABILITIES and STOCKHOLDERS' DEFICIT

Liabilities

Current liabilities

Notes payable and current maturities of long-term debt

$

676

$

946

Accounts payable

1,806

1,606

Other current liabilities

1,323

1,255

Total current liabilities

3,805

3,807

Long-term debt

4,528

4,521

Postretirement benefits liabilities

1,929

2,097

Other noncurrent liabilities

692

731

Total liabilities

10,954

11,156

Stockholders' deficit

Series D convertible junior preference stock

2

2

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

10

10

Additional paid-in capital

2,730

2,731

Accumulated deficit

(4,501)

(4,593)

Accumulated other comprehensive loss

(1,754)

(1,920)

Common stock held in treasury, at cost (3.9 and 4.2 shares, respectively)

(150)

(161)

Total stockholders' deficit attributable to Navistar International Corporation

(3,663)

(3,931)

Stockholders' equity attributable to non-controlling interests

3

5

Total stockholders' deficit

(3,660)

(3,926)

Total liabilities and stockholders' deficit

$

7,294

$

7,230

Navistar International Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended July 31,

(in millions)

2019

2018

Cash flows from operating activities

Net income

$

135

$

172

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

99

107

Depreciation of equipment leased to others

45

53

Deferred taxes, including change in valuation allowance

(41)

(3)

Asset impairment charges

6

11

Gain on sales of investments and businesses, net

(56)

—

Amortization of debt issuance costs and discount

15

23

Stock-based compensation

20

27

Provision for doubtful accounts

8

6

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

(3)

4

Write-off of debt issuance costs and discount

6

43

Other non-cash operating activities

(6)

(17)

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

(124)

(606)

Net cash provided by (used in) operating activities

104

(180)

Cash flows from investing activities

Purchases of marketable securities

—

(214)

Sales of marketable securities

—

460

Maturities of marketable securities

98

29

Capital expenditures

(90)

(79)

Purchases of equipment leased to others

(130)

(142)

Proceeds from sales of property and equipment

12

9

Proceeds from sales of investments and businesses

100

(3)

Other investing activities

1

—

Net cash provided by (used in) investing activities

(9)

60

Cash flows from financing activities

Proceeds from issuance of securitized debt

331

32

Principal payments on securitized debt

(300)

(50)

Net change in secured revolving credit facilities

120

64

Proceeds from issuance of non-securitized debt

144

3,210

Principal payments on non-securitized debt

(988)

(2,669)

Net change in notes and debt outstanding under revolving credit facilities

469

(52)

Debt issuance costs

(9)

(36)

Proceeds from financed lease obligations

13

48

Proceeds from exercise of stock options

3

7

Dividends paid by subsidiaries to non-controlling interest

(18)

(19)

Other financing activities

(2)

(17)

Net cash provided by (used in) financing activities

(237)

518

Effect of exchange rate changes on cash, cash equivalents and restricted cash

(7)

(16)

Increase (decrease) in cash, cash equivalents and restricted cash

(149)

382

Cash, cash equivalents and restricted cash at beginning of the period

1,445

840

Cash, cash equivalents and restricted cash at end of the period

$

1,296

$

1,222

Navistar International Corporation and Subsidiaries

Segment Reporting

(Unaudited)

We define segment profit (loss) as net income (loss) attributable to Navistar International Corporation, excluding income tax benefit (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, 2019

External sales and revenues, net

$

2,342

$

569

$

82

$

46

$

3

$

3,042

Intersegment sales and revenues

45

2

8

28

(83)

—

Total sales and revenues, net

$

2,387

$

571

$

90

$

74

$

(80)

$

3,042

Net income (loss) attributable to NIC

$

167

$

149

$

1

$

30

$

(191)

$

156

Income tax expense

—

—

—

—

(29)

(29)

Segment profit (loss)

$

167

$

149

$

1

$

30

$

(162)

$

185

Depreciation and amortization

$

26

$

1

$

3

$

16

$

1

$

47

Interest expense

—

—

—

27

49

76

Equity in income of non-consolidated affiliates

—

1

—

—

—

1

17

2

1

—

4

24

(in millions)

Truck

Parts

Global
Operations

Financial

Services^(A)

Corporate

and

Eliminations

Total

Three Months Ended July 31, 2018

External sales and revenues, net

$

1,894

$

603

$

68

$

40

$

1

$

2,606

Intersegment sales and revenues

22

2

21

25

(70)

—

Total sales and revenues, net

$

1,916

$

605

$

89

$

65

$

(69)

$

2,606

Net income (loss) attributable to NIC

$

165

$

144

$

4

$

23

$

(166)

$

170

Income tax expense

—

—

—

—

(3)

(3)

Segment profit (loss)

$

165

$

144

$

4

$

23

$

(163)

$

173

Depreciation and amortization

$

31

$

2

$

3

$

14

$

1

$

51

Interest expense

—

—

—

22

60

82

Equity in income (loss) of non-consolidated affiliates

1

1

(2)

—

—

—

      Capital expenditures^(B)

19

—

1

1

5

26

(in millions)

Truck

Parts

Global
Operations

Financial

Services^(A)

Corporate

and

Eliminations

Total

Nine Months Ended July 31, 2019

External sales and revenues, net

$

6,405

$

1,693

$

223

$

141

$

9

$

8,471

Intersegment sales and revenues

75

5

27

85

(192)

—

Total sales and revenues, net

$

6,480

$

1,698

$

250

$

226

$

(183)

$

8,471

Net income (loss) attributable to NIC

$

183

$

437

$

10

$

93

$

(604)

$

119

Income tax expense

—

—

—

—

(9)

(9)

Segment profit (loss)

$

183

$

437

$

10

$

93

$

(595)

$

128

Depreciation and amortization

$

78

$

4

$

7

$

48

$

7

$

144

Interest expense

—

—

—

83

160

243

Equity in income (loss) of non-consolidated affiliates

3

2

(1)

—

—

4

Capital expenditures^(B)

69

3

2

2

14

90

(in millions)

Truck

Parts

Global
Operations

Financial

Services^(A)

Corporate

and

Eliminations

Total

Nine Months Ended July 31, 2018

External sales and revenues, net

$

4,810

$

1,768

$

229

$

118

$

8

$

6,933

Intersegment sales and revenues

61

6

38

69

(174)

—

Total sales and revenues, net

$

4,871

$

1,774

$

267

$

187

$

(166)

$

6,933

Net income (loss) attributable to NIC

$

200

$

413

$

(2)

$

62

$

(521)

$

152

Income tax expense

—

—

—

—

(25)

(25)

Segment profit (loss)

$

200

$

413

$

(2)

$

62

$

(496)

$

177

Depreciation and amortization

$

100

$

5

$

8

$

41

$

6

$

160

Interest expense

—

—

—

64

176

240

Equity in income (loss) of non-consolidated affiliates

2

2

(4)

—

—

—

Capital expenditures^(B)

74

1

2

1

1

79

(A)  

Total sales and revenues in the Financial Services segment include interest revenues of $53 million and $161 million for the three and nine months ended July 31, 2019, respectively, and $46 million and $131 million for the three and nine months ended July 31, 2018, respectively.

(B)  

Exclusive of purchases of equipment leased to others.

(in millions)

Truck

Parts

Global
Operations

Financial

Services

Corporate

and

Eliminations

Total

Segment assets, as of:

July 31, 2019

$

1,942

$

686

$

322

$

3,010

$

1,334

$

7,294

October 31, 2018

2,085

636

331

2,648

1,530

7,230

EBITDA reconciliation:

Three Months Ended
July 31,

Nine Months Ended
July 31,

(in millions)

2019

2018

2018

Net income attributable to NIC

$

156

$

170

$

119

$

152

Plus:

Depreciation and amortization expense

47

51

144

160

Manufacturing interest expense^(A)

49

60

160

176

Adjusted for:

Income tax expense

(29)

(3)

(9)

(25)

EBITDA

$

281

$

284

$

432

$

513

(A)  

Manufacturing interest expense is the net interest expense primarily generated for borrowings that support the Manufacturing and Corporate operations, adjusted to eliminate intercompany interest expense with our Financial Services segment. The following table reconciles Manufacturing interest expense to the consolidated interest expense:

Three Months Ended
July 31,

Nine Months Ended
July 31,

(in millions)

2019

2018

2019

2018

Interest expense

$

76

$

82

$

243

$

240

Less: Financial services interest expense

27

22

83

64

Manufacturing interest expense

$

49

$

60

$

160

$

176

Adjusted EBITDA Reconciliation:

Three Months Ended
July 31,

Nine Months Ended
July 31,

(in millions)

2019

2018

2019

2018

EBITDA (reconciled above)

$

281

$

284

$

432

$

513

Adjusted for significant items of:

Adjustments to pre-existing warranties^(A)

5

(4)

7

(4)

Asset impairment charges^(B)

3

8

6

11

Restructuring of manufacturing operations^(C)

—

1

1

(1)

MaxxForce Advanced EGR engine lawsuits^(D)

(31)

—

128

1

Gain on sales^(E)

3

—

(56)

—

Debt refinancing charges^(F)

6

—

6

46

Pension settlement^(G)

—

—

142

9

Settlement gain^(H)

(1)

(71)

(3)

(71)

Total adjustments

(15)

(66)

231

(9)

Adjusted EBITDA

$

266

$

218

$

663

$

504

Adjusted Net Income attributable to NIC:

Three Months Ended
July 31,

Nine Months Ended
July 31,

(in millions)

2019

2018

2019

2018

Net income attributable to NIC

$

156

$

170

$

119

$

152

Adjusted for significant items of:

Adjustments to pre-existing warranties^(A)

5

(4)

7

(4)

Asset impairment charges^(B)

3

8

6

11

Restructuring of manufacturing operations^(C)

—

1

1

(1)

MaxxForce Advanced EGR engine lawsuits^(D)

(31)

—

128

1

Gain on sales^(E)

3

—

(56)

—

Debt refinancing charges^(F)

6

—

6

46

Pension settlement^(G)

—

—

142

9

Settlement gain^(H)

(1)

(71)

(3)

(71)

Total adjustments

(15)

(66)

231

(9)

Tax effect ^(I)

6

(9)

(41)

(5)

Adjusted Net income attributable to NIC

$

147

$

95

$

309

$

138

(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.

(B) 

In the third quarter and first nine months of 2019, we recorded $3 million and $6 million, respectively, of asset impairment charges relating to certain assets under operating leases in our Truck segment. In the third quarter and first nine months of 2018, we recorded $8 million and $11 million, respectively, of asset impairment charges related to the sale of our railcar business in Cherokee, Alabama and certain assets under operating leases in our Truck segment.

(C) 

In the third quarter and first nine months of 2019, we recorded a restructuring charge of zero and $1 million, respectively, in our Truck segment. In the third quarter and first nine months of 2018, we recorded a charge of $1 million and a benefit of $1 million, respectively, related to adjustments for restructuring in our Truck, Global Operations and Corporate segments.

(D) 

In the third quarter and first nine months of 2019, we recognized a net benefit of $31 million related to the MaxxForce engine EGR product litigation recorded during the third quarter of 2017 and a charge of $128 million related to MaxxForce Advanced EGR engine class action settlement and related litigation in our Truck segment. In the nine months ended July 31, 2018, we recognized a charge of $1 million for a jury verdict related to one of the MaxxForce Advanced EGR engine lawsuits in our Truck segment.

(E) 

In three months ended July 31, 2019, we recognized a charge of $3 million in our Truck segment for adjustments to the purchase price of the sale of a majority interest in the Navistar Defense business. In the first nine months of 2019, we recognized a gain of $51 million related to the sale of a majority interest in the Navistar Defense business in our Truck segment, and a gain of $5 million related to the sale of our joint venture in China with JAC in our Global Operations segment.

(F) 

In the third quarter and first nine months of 2019, we recorded a charge of $6 million for the write off of debt issuance costs and discounts associated with NFC Term Loan. In the first nine months of 2018, we recorded a charge of $46 million for the write off of debt issuance costs and discounts associated with the repurchase of our previously existing 8.25% Senior Notes and the refinancing of our previously existing Term Loan in Corporate.

(G) 

In the first nine months of 2019 and 2018, we purchased group annuity contracts for certain retired pension plan participants resulting in plan remeasurements. As a result, we recorded pension settlement accounting charges of $142 million and $9 million, respectively, in Other income, net in Corporate.

(H) 

In the third quarter and first nine months of 2019, we recorded interest income of $1 million and $3 million, respectively, in Other income, net derived from the prior year settlement of a business economic loss claim relating to our former Alabama engine manufacturing facility in Corporate.

(I) 

Tax effect is calculated by excluding the impact of the non-GAAP adjustments from the interim period tax provision calculations. 

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

As of July 31, 2019

(in millions)

Manufacturing
Operations

Financial
Services
Operations

Consolidated
Balance Sheet

Assets

Cash and cash equivalents

$

1,112

$

48

$

1,160

Marketable securities

3

—

$

3

Total cash, cash equivalents, and marketable securities

$

1,115

$

48

$

1,163

Manufacturing free cash flow reconciliation:

(in millions)

July 31, 2019

Consolidated net cash from operating activities

$

294

Less: net cash from Financial Services Operations

20

Net cash from Manufacturing Operations^(A)

274

Plus: manufacturing Capital Expenditures

(24)

Manufacturing free cash flow

$

250

(A)

Net of adjustments required to eliminate certain intercompany transactions between Manufacturing operations and Financial Services operations.