Form 8-K NAVISTAR INTERNATIONAL For: Sep 06
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 8-K
____________________________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 6, 2018
_____________________________________
NAVISTAR INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
_____________________________________
Delaware | 1-9618 | 36-3359573 | ||
(State or other jurisdiction of incorporation or organization) | (Commission File No.) | (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
_____________________________________
(Former name or former address, if changed since last report.) |
_____________________________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
ITEM 2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In accordance with General Instruction B.2. to Form 8-K, the following information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.
The information regarding the results of operations and financial condition of Navistar International Corporation (the “Company”) responsive to this Item 2.02, and contained in Exhibit 99.1 filed herewith, is incorporated into this Item 2.02 by reference.
ITEM 7.01 REGULATION FD DISCLOSURE
In accordance with General Instruction B.2. to Form 8-K, the following information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.
On September 6, 2018, Navistar International Corporation (the “Company”) filed its Quarterly Report on Form 10-Q for the period ended July 31, 2018 with the Securities and Exchange Commission. The Company’s press release announcing the filing is attached as Exhibit 99.1 to this Current Report and is incorporated by reference herein.
The Company will present via live web cast its fiscal 2018 third quarter financial results on Thursday, September 6th. A live web cast is scheduled at approximately 9:00 a.m. Eastern (8:00 a.m. Central). Speakers on the web cast will include Troy Clarke, Chairman, President and Chief Executive Officer, Walter Borst, Executive Vice President and Chief Financial Officer, among other company leaders. A copy of the slides containing financial and operating information to be used as part of the web cast are attached as Exhibit 99.2 to this Current Report and are incorporated by reference herein.
The web cast can be accessed through a link on the investor relations page of the Company’s web site at http://www.navistar.com/navistar/investors/webcasts. Investors are advised to log on to the website at least 15 minutes prior to the start of the web cast to allow sufficient time to download any necessary software. The web cast will be available for replay at the same address approximately three hours following its conclusion, and will remain available for a limited time.
Navistar International Corporation (NYSE: NAV) is a holding company whose subsidiaries and affiliates produce International® brand commercial and military trucks, proprietary diesel engines, and IC Bus™ brand school and commercial buses. An affiliate also provides truck and diesel engine service parts. Another affiliate offers financing services. Additional information is available at www.Navistar.com.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(d) | Exhibits | |
Forward-Looking Statements
Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements only speak as of the date of this report and the company assumes no obligation to update the information included in this report. Such forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as believe, expect, anticipate, intend, plan, estimate, or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. For a further description of these factors, see the risk factors set forth in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended October 31, 2017 and our quarterly report on Form 10-Q for the period ended January 31, 2018. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
NAVISTAR INTERNATIONAL CORPORATION | |
(Registrant) | |
By: | /s/ WALTER G. BORST |
Name: | Walter G. Borst |
Title: | Executive Vice President and Chief Financial Officer |
Dated: September 6, 2018
Media contact: Lyndi McMillan, [email protected], 331-332-3181
Investor contact: Marty Ketelaar, [email protected], 331-332-2706
Web site: www.Navistar.com/newsroom
NAVISTAR REPORTS THIRD QUARTER 2018 RESULTS
• | Reports net income of $170 million, or $1.71 per diluted share, on revenues of $2.6 billion |
• | Generates $218 million of adjusted EBITDA in the quarter |
• | Raises industry and financial guidance for the year |
LISLE, Ill. - September 6, 2018 - Navistar International Corporation (NYSE: NAV) today announced third quarter 2018 net income of $170 million, or $1.71 per diluted share, compared to third quarter 2017 net income of $37 million, or $0.38 per diluted share.
Third quarter 2018 EBITDA was $284 million, versus EBITDA of $160 million in the same period one year earlier. The third quarter of 2018 included $66 million in adjustments, including a $71 million gain from a one-time settlement, $4 million of pre-existing warranty accrual reversals, and $9 million in charges for asset impairments and restructuring costs. Excluding those items, adjusted EBITDA was $218 million in the third quarter of 2018, compared to $194 million in the same period one year ago. While adjusted EBITDA for the third quarter was affected by supplier constraints that delayed deliveries and impacted volumes, the company aggressively managed these headwinds. These vehicles are making their way through the delivery process and will be reflected in fourth quarter sales.
Revenues in the quarter were $2.6 billion, up 18 percent from the same period one year ago, primarily due to a 26 percent increase in Core market (Class 6-8 trucks and buses in the United States and Canada) volumes.
“We had a strong quarter that took full advantage of healthy industry volumes and the market’s enthusiasm for our new products,” said Troy A. Clarke, Navistar chairman, president and chief executive officer.
Navistar ended third quarter 2018 with $1.12 billion in consolidated cash, cash equivalents and marketable securities. Manufacturing cash, cash equivalents and marketable securities were $1.08 billion at the end of the quarter.
The company had a number of product highlights during its third quarter. Year-over-year growth in Class 8 heavy retail market share, up 2.7 points, was attributable to strong sales of the LT Series on-highway truck and the 12.4-liter A26 engine. International A26 engine market share penetration more than doubled from the year ago quarter, and the engine is now also available in the company’s severe service vehicles, the HV Series and HX Series. Additionally, the new MV Series contributed to 66 percent growth in medium-duty orders.
In the school bus segment, the company was the first in the industry to make electronic stability control and collision mitigation technology standard on its IC Bus® CE Series and RE Series school buses. With these new standard systems in place, IC Bus has the most robust collision mitigation offering in the industry.
Additionally, the company announced that all new on-highway International® trucks will be equipped with an OnCommand® Connection telematics device with two free years of service included. The OnCommand Connection device integrates a cellular-enabled hardware platform with a range of technology solutions, including telematics and the OnCommand Connection Advanced Remote Diagnostics platform.
2018 INDUSTRY AND FINANCIAL GUIDANCE
Based on stronger industry conditions, the company raised its 2018 full-year guidance:
• | Industry retail deliveries of Class 6-8 trucks and buses in the United States and Canada are forecast to be 390,000 to 410,000 units, with Class 8 retail deliveries of 260,000 to 280,000 units. |
• | Navistar revenues are expected to be between $10.1 billion and $10.4 billion. |
• | The company’s adjusted EBITDA is expected to be between $775 million and $825 million. |
• | Year-end manufacturing cash is expected to be above $1.25 billion. |
Additionally, the company forecasts the industry’s 2019 retail deliveries of Class 6-8 trucks and buses in the United States and Canada to be in the range of 385,000 to 415,000 units, with Class 8 retail deliveries between 255,000 and 285,000 units.
“Our team has delivered substantial accomplishments this year, including growing Class 8 share, building our backlog and effectively managing costs,” Clarke said. “Our progress positions us well for a very strong fourth quarter and another good year in 2019.”
SEGMENT REVIEW
Summary of Financial Results:
(Unaudited) | |||||||||||||||
Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||
(in millions, except per share data) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Sales and revenues, net | $ | 2,606 | $ | 2,213 | $ | 6,933 | $ | 5,972 | |||||||
Segment Results: | |||||||||||||||
Truck | $ | 165 | $ | 7 | $ | 200 | $ | (118 | ) | ||||||
Parts | 144 | 157 | 413 | 459 | |||||||||||
Global Operations | 4 | 3 | (2 | ) | (8 | ) | |||||||||
Financial Services | 23 | 23 | 62 | 51 | |||||||||||
Income (loss) from continuing operations, net of tax(A) | $ | 170 | $ | 36 | $ | 152 | $ | (106 | ) | ||||||
Net income (loss)(A) | 170 | 37 | 152 | (105 | ) | ||||||||||
Diluted income (loss) per share from continuing operations(A) | $ | 1.71 | $ | 0.37 | $ | 1.53 | $ | (1.16 | ) | ||||||
Diluted income (loss) per share(A) | 1.71 | 0.38 | 1.53 | (1.15 | ) | ||||||||||
(A) Amounts attributable to Navistar International Corporation.
Truck Segment - Truck segment net sales increased 25 percent to $1.9 billion compared to third quarter 2017, due to higher volumes in Core markets, an increase in military sales and a favorable shift in model mix.
For the third quarter 2018, the Truck segment recorded a profit of $165 million compared to $7 million for the same period one year ago. The improvement was primarily driven by the impact of higher volumes in Core markets and lower charges related to legacy engine litigation recorded in the third quarter of 2017. The segment also benefited from a settlement of a business economic claim. The segment was negatively impacted by industry supplier constraints that resulted in higher company inventory, lower volumes, cost inefficiencies in the assembly process and additional freight costs.
Parts Segment - Parts segment net sales increased $19 million, to $605 million, compared to third quarter 2017, due to continued double-digit growth of the Fleetrite™ brand, partially offset by lower Blue Diamond Parts (BDP) sales.
For the third quarter 2018, the Parts segment recorded a profit of $144 million, down eight percent compared to third quarter 2017, primarily due to lower proprietary parts sales, higher freight-related expenses and intercompany access fees.
Global Operations Segment - Global Operations net sales increased six percent, to $89 million, compared to third quarter 2017, due primarily to higher engine volumes.
For the third quarter 2018, the Global Operations segment profit was $4 million, comparable to the same period one year ago.
Financial Services Segment - Financial Services net revenues increased by $3 million to $65 million compared to third quarter 2017, primarily due to higher average portfolio balances in the U.S. and Mexico.
For the third quarter 2018, the Financial Services segment recorded a profit of $23 million, comparable to third quarter 2017. During the quarter, Navistar Financial Corporation issued a $400 million seven-year senior secured Term Loan B.
About Navistar
Navistar International Corporation (NYSE: NAV) is a holding company whose subsidiaries and affiliates produce International® brand commercial and military trucks, proprietary diesel engines, and IC Bus® brand school and commercial buses. An affiliate also provides truck and diesel engine service parts. Another affiliate offers financing services. Additional information is available at www.Navistar.com.
Forward-Looking Statement
Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements only speak as of the date of this report and the company assumes no obligation to update the information included in this report. Such forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as believe, expect, anticipate, intend, plan, estimate, or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. For a further description of these factors, see the risk factors set forth in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended October 31, 2017, which was filed on December 19, 2017 and our Quarterly Report on Form 10-Q for the quarter ended January 31, 2018, which was filed on March 8, 2018. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.
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) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Sales and revenues | |||||||||||||||
Sales of manufactured products, net | $ | 2,566 | $ | 2,178 | $ | 6,815 | $ | 5,870 | |||||||
Finance revenues | 40 | 35 | 118 | 102 | |||||||||||
Sales and revenues, net | 2,606 | 2,213 | 6,933 | 5,972 | |||||||||||
Costs and expenses | |||||||||||||||
Costs of products sold | 2,096 | 1,803 | 5,615 | 4,949 | |||||||||||
Restructuring charges | 1 | (13 | ) | (1 | ) | (4 | ) | ||||||||
Asset impairment charges | 8 | 6 | 11 | 13 | |||||||||||
Selling, general and administrative expenses | 244 | 233 | 686 | 654 | |||||||||||
Engineering and product development costs | 72 | 61 | 222 | 189 | |||||||||||
Interest expense | 82 | 91 | 240 | 262 | |||||||||||
Other income, net | (77 | ) | (8 | ) | (37 | ) | (7 | ) | |||||||
Total costs and expenses | 2,426 | 2,173 | 6,736 | 6,056 | |||||||||||
Equity in income of non-consolidated affiliates | — | 1 | — | 6 | |||||||||||
Income (loss) from continuing operations before income taxes | 180 | 41 | 197 | (78 | ) | ||||||||||
Income tax expense | (3 | ) | — | (25 | ) | (10 | ) | ||||||||
Income (loss) from continuing operations | 177 | 41 | 172 | (88 | ) | ||||||||||
Income from discontinued operations, net of tax | — | 1 | — | 1 | |||||||||||
Net income (loss) | 177 | 42 | 172 | (87 | ) | ||||||||||
Less: Net income attributable to non-controlling interests | 7 | 5 | 20 | 18 | |||||||||||
Net income (loss) attributable to Navistar International Corporation | $ | 170 | $ | 37 | $ | 152 | $ | (105 | ) | ||||||
Amounts attributable to Navistar International Corporation common shareholders: | |||||||||||||||
Income (loss) from continuing operations, net of tax | $ | 170 | $ | 36 | $ | 152 | $ | (106 | ) | ||||||
Income from discontinued operations, net of tax | — | 1 | — | 1 | |||||||||||
Net income (loss) | $ | 170 | $ | 37 | $ | 152 | $ | (105 | ) | ||||||
Income (loss) per share: | |||||||||||||||
Basic: | |||||||||||||||
Continuing operations | $ | 1.72 | $ | 0.37 | $ | 1.54 | $ | (1.16 | ) | ||||||
Discontinued operations | — | 0.01 | — | 0.01 | |||||||||||
$ | 1.72 | $ | 0.38 | $ | 1.54 | $ | (1.15 | ) | |||||||
Diluted: | |||||||||||||||
Continuing operations | $ | 1.71 | $ | 0.37 | $ | 1.53 | $ | (1.16 | ) | ||||||
Discontinued operations | — | 0.01 | — | 0.01 | |||||||||||
$ | 1.71 | $ | 0.38 | $ | 1.53 | $ | (1.15 | ) | |||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 99.0 | 98.3 | 98.8 | 91.1 | |||||||||||
Diluted | 99.7 | 98.6 | 99.6 | 91.1 | |||||||||||
Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
July 31, | October 31, | ||||||
(in millions, except per share data) | 2018 | 2017 | |||||
ASSETS | (Unaudited) | ||||||
Current assets | |||||||
Cash and cash equivalents | $ | 1,022 | $ | 706 | |||
Restricted cash and cash equivalents | 148 | 83 | |||||
Marketable securities | 95 | 370 | |||||
Trade and other receivables, net | 403 | 391 | |||||
Finance receivables, net | 1,638 | 1,565 | |||||
Inventories, net | 1,400 | 857 | |||||
Other current assets | 199 | 188 | |||||
Total current assets | 4,905 | 4,160 | |||||
Restricted cash | 52 | 51 | |||||
Trade and other receivables, net | 49 | 13 | |||||
Finance receivables, net | 259 | 220 | |||||
Investments in non-consolidated affiliates | 53 | 56 | |||||
Property and equipment (net of accumulated depreciation and amortization of $2,468 and $2,474, respectively) | 1,297 | 1,326 | |||||
Goodwill | 38 | 38 | |||||
Intangible assets (net of accumulated amortization of $139 and $135, respectively) | 30 | 40 | |||||
Deferred taxes, net | 130 | 129 | |||||
Other noncurrent assets | 111 | 102 | |||||
Total assets | $ | 6,924 | $ | 6,135 | |||
LIABILITIES and STOCKHOLDERS’ DEFICIT | |||||||
Liabilities | |||||||
Current liabilities | |||||||
Notes payable and current maturities of long-term debt | $ | 1,707 | $ | 1,169 | |||
Accounts payable | 1,527 | 1,292 | |||||
Other current liabilities | 1,075 | 1,184 | |||||
Total current liabilities | 4,309 | 3,645 | |||||
Long-term debt | 3,893 | 3,889 | |||||
Postretirement benefits liabilities | 2,378 | 2,497 | |||||
Other noncurrent liabilities | 678 | 678 | |||||
Total liabilities | 11,258 | 10,709 | |||||
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 | 2,731 | 2,733 | |||||
Accumulated deficit | (4,781 | ) | (4,933 | ) | |||
Accumulated other comprehensive loss | (2,138 | ) | (2,211 | ) | |||
Common stock held in treasury, at cost (4.2 and 4.6 shares, respectively) | (163 | ) | (179 | ) | |||
Total stockholders’ deficit attributable to Navistar International Corporation | (4,339 | ) | (4,578 | ) | |||
Stockholders’ equity attributable to non-controlling interests | 5 | 4 | |||||
Total stockholders’ deficit | (4,334 | ) | (4,574 | ) | |||
Total liabilities and stockholders’ deficit | $ | 6,924 | $ | 6,135 | |||
Navistar International Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended July 31, | |||||||
(in millions) | 2018 | 2017 | |||||
Cash flows from operating activities | |||||||
Net income (loss) | $ | 172 | $ | (87 | ) | ||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||
Depreciation and amortization | 107 | 113 | |||||
Depreciation of equipment leased to others | 53 | 56 | |||||
Deferred taxes, including change in valuation allowance | (3 | ) | (16 | ) | |||
Asset impairment charges | 11 | 13 | |||||
Gain on sales of investments and businesses, net | — | (5 | ) | ||||
Amortization of debt issuance costs and discount | 23 | 36 | |||||
Stock-based compensation | 27 | 19 | |||||
Provision for doubtful accounts | 6 | 9 | |||||
Equity in income of non-consolidated affiliates, net of dividends | 4 | 1 | |||||
Write-off of debt issuance costs and discount | 43 | 4 | |||||
Other non-cash operating activities | (17 | ) | (21 | ) | |||
Changes in other assets and liabilities, exclusive of the effects of businesses disposed | (606 | ) | (290 | ) | |||
Net cash used in operating activities | (180 | ) | (168 | ) | |||
Cash flows from investing activities | |||||||
Purchases of marketable securities | (214 | ) | (619 | ) | |||
Sales of marketable securities | 460 | 586 | |||||
Maturities of marketable securities | 29 | 17 | |||||
Net change in restricted cash and cash equivalents | (66 | ) | (25 | ) | |||
Capital expenditures | (79 | ) | (93 | ) | |||
Purchases of equipment leased to others | (142 | ) | (96 | ) | |||
Proceeds from sales of property and equipment | 9 | 32 | |||||
Investments in non-consolidated affiliates | — | (2 | ) | ||||
Proceeds from (payments for) sales of affiliates | (3 | ) | 6 | ||||
Net cash used in investing activities | (6 | ) | (194 | ) | |||
Cash flows from financing activities | |||||||
Proceeds from issuance of securitized debt | 32 | 278 | |||||
Principal payments on securitized debt | (50 | ) | (326 | ) | |||
Net change in secured revolving credit facilities | 64 | 119 | |||||
Proceeds from issuance of non-securitized debt | 3,210 | 491 | |||||
Principal payments on non-securitized debt | (2,669 | ) | (368 | ) | |||
Net change in notes and debt outstanding under revolving credit facilities | (52 | ) | 23 | ||||
Principal payments under financing arrangements and capital lease obligations | — | (1 | ) | ||||
Debt issuance costs | (36 | ) | (22 | ) | |||
Proceeds from financed lease obligations | 48 | 49 | |||||
Issuance of common stock | — | 256 | |||||
Stock issuance costs | — | (11 | ) | ||||
Proceeds from exercise of stock options | 7 | 4 | |||||
Dividends paid by subsidiaries to non-controlling interest | (19 | ) | (21 | ) | |||
Other financing activities | (17 | ) | (3 | ) | |||
Net cash provided by financing activities | 518 | 468 | |||||
Effect of exchange rate changes on cash and cash equivalents | (16 | ) | 1 | ||||
Increase in cash and cash equivalents | 316 | 107 | |||||
Cash and cash equivalents at beginning of the period | 706 | 804 | |||||
Cash and cash equivalents at end of the period | $ | 1,022 | $ | 911 | |||
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 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, 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 | ||||||||||
Income (loss) from continuing operations attributable to NIC, net of tax | $ | 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 | |||||||||||||||||
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 | ||||||||||||||||||
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 | |||||||||||
Income (loss) from continuing operations attributable to NIC, net of tax | $ | 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 | ||||||||||||||||||
(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 | Corporate and Eliminations | Total | |||||||||||||||||
Segment assets, as of: | |||||||||||||||||||||||
July 31, 2018 | $ | 2,264 | $ | 645 | $ | 335 | $ | 2,407 | $ | 1,273 | $ | 6,924 | |||||||||||
October 31, 2017 | 1,621 | 632 | 378 | 2,207 | 1,297 | 6,135 | |||||||||||||||||
(A) | Total sales and revenues in the Financial Services segment include interest revenues of $46 million and $131 million for the three and nine months ended July 31, 2018, respectively, and $45 million and $121 million for the three and nine months ended July 31, 2017, respectively. |
(B) | Exclusive of purchases of equipment leased to others. |
SEC Regulation G Non-GAAP Reconciliation
The financial measures presented below are unaudited and not in accordance with, or an alternative for, financial measures presented in accordance with U.S. generally accepted accounting principles ("GAAP"). The non-GAAP financial information presented herein should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP and are reconciled to the most appropriate GAAP number below.
Earnings (loss) Before Interest, Income Taxes, Depreciation, and Amortization (“EBITDA”):
We define EBITDA as our consolidated net income (loss) attributable to Navistar International Corporation, net of tax, plus manufacturing interest expense, income taxes, and depreciation and amortization. We believe EBITDA provides meaningful information regarding the performance of our business and therefore we use it to supplement our GAAP reporting. We have chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of operating results.
Adjusted EBITDA:
We believe that adjusted EBITDA, which excludes certain identified items that we do not consider to be part of our ongoing business, improves the comparability of year to year results, and is representative of our underlying performance. Management uses this information to assess and measure the performance of our operating segments. We have chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of operating results, to illustrate the results of operations giving effect to the non-GAAP adjustments shown in the below reconciliations, and to provide an additional measure of performance.
Manufacturing Cash, Cash Equivalents, and Marketable Securities:
Manufacturing cash, cash equivalents, and marketable securities represent the Company’s consolidated cash, cash equivalents, and marketable securities excluding cash, cash equivalents, and marketable securities of our financial services operations. We include marketable securities with our cash and cash equivalents when assessing our liquidity position as our investments are highly liquid in nature. We have chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of our ability to meet our operating requirements, capital expenditures, equity investments, and financial obligations.
Structural costs consist of Selling, general and administrative expenses and Engineering and product development costs.
EBITDA reconciliation:
Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Income (loss) from continuing operations attributable to NIC, net of tax | $ | 170 | $ | 36 | $ | 152 | $ | (106 | ) | ||||||
Plus: | |||||||||||||||
Depreciation and amortization expense | 51 | 57 | 160 | 169 | |||||||||||
Manufacturing interest expense(A) | 60 | 67 | 176 | 197 | |||||||||||
Adjusted for: | |||||||||||||||
Income tax expense | (3 | ) | — | (25 | ) | (10 | ) | ||||||||
EBITDA | $ | 284 | $ | 160 | $ | 513 | $ | 270 | |||||||
(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) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Interest expense | $ | 82 | $ | 91 | $ | 240 | $ | 262 | |||||||
Less: Financial services interest expense | 22 | 24 | 64 | 65 | |||||||||||
Manufacturing interest expense | $ | 60 | $ | 67 | $ | 176 | $ | 197 | |||||||
Adjusted EBITDA Reconciliation:
_____________________
Three Months Ended July 31, | Nine Months Ended July 31, | ||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | |||||||||||
EBITDA (reconciled above) | $ | 284 | $ | 160 | $ | 513 | $ | 270 | |||||||
Adjusted for significant items of: | |||||||||||||||
Adjustments to pre-existing warranties(A) | (4 | ) | 6 | (4 | ) | (4 | ) | ||||||||
Asset impairment charges(B) | 8 | 6 | 11 | 13 | |||||||||||
Restructuring of manufacturing operations(C) | 1 | (3 | ) | (1 | ) | 6 | |||||||||
EGR product litigation(D) | — | 31 | 1 | 31 | |||||||||||
Gain on sale(E) | — | (6 | ) | — | (6 | ) | |||||||||
Debt refinancing charges(F) | — | — | 46 | 4 | |||||||||||
Pension settlement(G) | — | — | 9 | — | |||||||||||
Settlement gain(H) | (71 | ) | — | (71 | ) | — | |||||||||
Total adjustments | (66 | ) | 34 | (9 | ) | 44 | |||||||||
Adjusted EBITDA | $ | 218 | $ | 194 | $ | 504 | $ | 314 | |||||||
(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 2018, we recorded $8 million and $11 million, respectively, of impairment charges related to the sale of our railcar business in Cherokee, Alabama, certain long-lived assets and certain assets under operating leases in our Truck and Financial Services segments. In the third quarter and first nine months of 2017, we recorded $6 million and $13 million, respectively, of asset impairment charges relating to assets held for the sale of our Conway, Arkansas fabrication business and for certain assets under operating leases in our Truck segment. |
(C) | 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. In the third quarter and first nine months of 2017, we recorded a benefit of $3 million and a charge of $6 million for restructuring in our Truck segment. In the third quarter of 2017, we recorded $41 million of charges related to our plan to cease production at our Melrose Park Facility, a net benefit of $43 million related to the resolution of the closing agreement for our Chatham, Ontario plant, and the release of $1 million in OPEB liabilities in connection with the sale of our fabrication business in Conway, Arkansas. 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 restructuring charges in our Truck and Corporate segments. |
(D) | In the first nine months of 2018, we recognized an additional charge of $1 million for a jury verdict related to the Maxxforce engine EGR product litigation in our Truck segment. In the first nine months of 2017, we recognized a charge of $31 million for a jury verdict related to the Maxxforce engine EGR product 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 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 8.25% Senior Notes and the refinancing of our previously existing Term Loan. In the first nine months of 2017, we recorded a charge of $4 million related to third party fees and debt issuance costs associated with the repricing of our previously existing Term Loan. |
(G) | In the first quarter of 2018, we purchased a group annuity contract for certain retired pension plan participants resulting in a plan remeasurement. As a result, we recorded a pension settlement accounting charge of $9 million in SG&A expenses. |
(H) | In the third quarter of 2018, we settled a business economic loss claim relating to our Alabama engine manufacturing facility in which we will receive a net present value of $70 million, net of our fees and costs, from the Deepwater Horizon Settlement Program. We recorded the $70 million net present value of the settlement and related interest income of $1 million in Other Income, net. |
Manufacturing segment cash, cash equivalents, and marketable securities reconciliation:
As of July 31, 2018 | |||||||||||
(in millions) | Manufacturing Operations | Financial Services Operations | Consolidated Balance Sheet | ||||||||
Assets | |||||||||||
Cash and cash equivalents | $ | 989 | $ | 33 | $ | 1,022 | |||||
Marketable securities | 95 | — | 95 | ||||||||
Total cash, cash equivalents, and marketable securities | $ | 1,084 | $ | 33 | $ | 1,117 | |||||
Q3 2018 EARNINGS PRESENTATION September 6, 2018 ® International is a registered trademark of , Inc. NYSE: NAV
Safe Harbor Statement and Other Cautionary Notes Information provided and statements contained in this presentation that are not purely historical are forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements only speak as of the date of this presentation and Navistar International Corporation assumes no obligation to update the information included in this presentation. Such forward-looking statements include information concerning our possible or assumed future results of operations and descriptions of our business strategy. These statements often include words such as believe, expect, anticipate, intend, plan, estimate, or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. For a further description of these factors, see the risk factors set forth in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended October 31, 2017, which was filed on December 19, 2017 and our Quarterly Report on Form 10-Q for the quarter ended January 31, 2018, which was filed on March 8, 2018. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events. The financial information herein contains audited and unaudited information and has been prepared by management in good faith and based on data currently available to the company. Certain non-GAAP measures are used in this presentation to assist the reader in understanding our core manufacturing business. We believe this information is useful and relevant to assess and measure the performance of our core manufacturing business as it illustrates manufacturing performance. It also excludes financial services and other items that may not be related to the core manufacturing business or underlying results. Management often uses this information to assess and measure the underlying performance of our operating segments. We have chosen to provide this supplemental information to investors, analysts, and other interested parties to enable them to perform additional analyses of operating results. The non-GAAP measures are reconciled to the most appropriate GAAP measure in the appendix of this presentation. Q3 2018 Earnings – 9/6/2018 NYSE: NAV 2
Third Quarter 2018 Highlights • Industry remains strong • Class 8 heavy market share up 2.7 points year-over-year o 13L heavy share more than doubled • Revenues higher, led by 25% increase in Truck • Net Income rose to $170 million • Adjusted EBITDA up 12% to $218 million • Supplier constraints impacting industry • 2018 financial guidance increased • Strong collaboration with TRATON Group (formerly Volkswagen Truck & Bus) Note: This slide contains non-GAAP information; please see the REG G in appendix for a detailed reconciliation. Q3 2018 Earnings – 9/6/2018 NYSE: NAV 3
Capitalizing On A Strong Industry ($ in millions, except per share and units) Quarters Ended July 31 2018 2017 Chargeouts(A) 19,100 15,100 Sales and revenues $2,606 $2,213 Net income(B) $170 $37 Diluted income per share(B) $1.71 $0.38 Adjusted EBITDA $218 $194 Adjusted EBITDA margin 8.4% 8.8% (A) Includes U.S. and Canada School buses and Class 6-8 trucks. Note: This slide contains non-GAAP information; please see the Q3 2018 Earnings – 9/6/2018 (B) Amounts attributable to Navistar International Corporation, net of tax. REG G in appendix for a detailed reconciliation. NYSE: NAV 4
Strong Truck Segment Growing Profitability ($ in millions) Sales and Revenues Segment Profit Quarters Ended Quarters Ended July 31 July 31 2018 2017 2018 2017 Truck $1,916 $1,531 $165 $7 Parts $605 $586 $144 $157 Global Operations $89 $84 $4 $3 Financial Services $65 $62 $23 $23 Q3 2018 Earnings – 9/6/2018 NYSE: NAV 5
Solid Manufacturing Cash Balance ($ in millions) Manufacturing Cash(A) $1,200 $1,100 $1,084 $1,036 • 2018 Q3 cash balance $923 $947 $800 o Consolidated cash: $1.12 billion o Manufacturing cash: $1.08 billion(A) $400 • Strong cash position to address near-term maturities $0 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 (A) Amounts include manufacturing cash, cash equivalents, and marketable securities. Q3 2018 Earnings – 9/6/2018 Note: This slide contains non-GAAP information; please see the REG G in appendix for a detailed reconciliation. NYSE: NAV 6
Strong Industry Expected To Continue Into 2019 Actual Guidance 2017 2018 2019 Class 8 industry 207K 260-280K 255-285K Class 6/7 medium 86K 95K 95K School bus 35K 35K 35K Core markets industry 328K 390-410K 385-415K Q3 2018 Earnings – 9/6/2018 NYSE: NAV 7
Revising 2018 Financial Guidance 2017 Actuals 2018 Guidance Revenue $8.6B $10.1-$10.4B Gross margin 17.9% 18.6% Adjusted EBITDA $582M $775-$825M Manufacturing cash $1.0B >$1.25B(A) Manufacturing interest expense $269M $230M Warranty spend greater than expense $184M $125M Capital expenditures $102M $115M Pension/OPEB contributions greater $75M $100M than expense Increased from prior guidance No change from prior guidance Decreased from prior guidance Note: This slide contains non-GAAP information; please see the REG G in appendix for a detailed reconciliation. Q3 2018 Earnings – 9/6/2018 (A) 2018 manufacturing cash guidance reflects expected repayment of 2018 convertible debt. NYSE: NAV 8
Appendix Q3 2018 Earnings – 9/6/2018 NYSE: NAV 9
Further Progress on Legacy Issues ($ in millions) Used Truck Inventory $500 • Gross inventory balance: $191 million o MaxxForce13s in inventory: ~1,100 $250 • Net inventory balance: $143 million $0 Q3 Q4 Q1 Q2 Q3 • Q3 inventory reserve: 2017 2017 2018 2018 2018 Gross Inventory Net Inventory $48 million $1,000 Warranty Spend vs. Expense • Q3 warranty expense $750 (excluding pre-existing) as a $500 percentage of revenue: 1.7% o 2.4% in 3Q17 $250 • Warranty liability balance: $0 $531 million 2013 2014 2015 2016 2017 2018 Warranty Spend Warranty Expense Q3 2018 Earnings – 9/6/2018 NYSE: NAV 10
U.S. and Canada Dealer Stock Inventory* 6,000 5,500 5,000 4,500 4,000 3,500 3,000 *Includes U.S. and Canada Class 4-8 truck inventory, but does not include U.S. IC Bus. Q3 2018 Earnings – 9/6/2018 NYSE: NAV 11
Retail Market Share in Commercial Vehicle Segments Three Months Ended July 31 , April 30 , January 31, October 31, July 31, 2018 2018 2018 2017 2017 Core Markets (U.S. and Canada) Class 6 and 7 medium trucks ........................................................ 22% 26 % 20 % 23 % 25 % Class 8 heavy trucks ......................................................................... 13% 13 % 11 % 14 % 10% Class 8 severe service trucks ......................................................... 11% 12 % 12 % 16 % 12% Combined class 8 trucks ................................................................. 12% 13 % 11 % 15 % 11 % Class 6/7 Class 8 Class 8 Medium-Duty Heavy Severe Service Q3 2018 Earnings – 9/6/2018 NYSE: NAV 12
Worldwide Truck Chargeouts Three Months Ended July 31, % 2018 2017 Change Change Core Markets (U.S. and Canada) School buses(A)................................................. 3,700 3,900 (200) -5% Class 6 and 7 medium trucks .......................... 6,300 4,800 1,500 31% Class 8 heavy trucks ......................................... 7,200 4,200 3,000 71% Class 8 severe service trucks............................. 1,900 2,200 (300) -14% Total Core markets.......................... 19,100 15,100 4,000 26% Non "Core" military........................................... 100 200 (100) -50% Other markets(B)............................................... 2,500 2,900 (400) -14% Total worldwide units...................... 21,700 18,200 3,500 19% Combined class 8 trucks .................................. 9,100 6,400 2,700 42% We define chargeouts as trucks that have been invoiced to customers. The units held in dealer inventory represent the principal difference between retail deliveries and chargeouts. The above table summarizes our approximate worldwide chargeouts. We define our Core markets to include U.S. and Canada School bus and Class 6 through 8 trucks. (A) The School bus chargeouts include buses classified as B, C, and D and are being reported on a one-month lag. (B) Other markets primarily consist of Export Truck and Mexico. Q3 2018 Earnings – 9/6/2018 NYSE: NAV 13
Financial Services Segment Highlights • Financial Services segment profit of $23M for Q3 2018 and $62M for YTD 2018 • NFC1 earned pre-tax profit of $14.6M for Q3 and $36.1M for YTD 2018 • NFC financing availability of $382M as of July 31, 2018, $231M available under the $269M revolver • Financial Services debt/equity leverage of 3.5:1 as of July 31, 2018 • Term Loan B debt of $400M issued in July 2018 NFC Facilities Dealer Floor Plan Retail Notes Bank and Term Loan B • NFSC wholesale trust as of July • Revolver capacity of $269M 31, 2018 matures September 2021, Term C A P I T A L Loan B of $400M matures July – $900M funding facility Funded by BMO Financial Group – Variable portion matures 2025 December 2018 • Program management continuity – Funding for retail notes, – Term portions mature • Broad product offering wholesale notes, retail accounts, September 2018 and June 2019 • Ability to support large fleets and dealer open accounts • On balance sheet • On balance sheet • Access to less expensive capital 1Navistar Financial Corporation (NFC) is the US financial entity of Navistar’s Financial Services segment Q3 2018 Earnings – 9/6/2018 NYSE: NAV 14
Frequently Asked Questions Q1: What is included in Corporate and Eliminations? A: The primary drivers of Corporate and Eliminations are Corporate SG&A, pension and OPEB expense (excluding amounts allocated to the segments), annual incentive, manufacturing interest expense, and the elimination of intercompany sales and profit between segments. Q2: What is included in your equity in income of non-consolidated affiliates? A: Equity in loss of non-consolidated affiliates is derived from our ownership interests in partially-owned affiliates that are not consolidated. Q3: What is your net income attributable to non-controlling interests? A: Net income attributable to non-controlling interests is the result of the consolidation of subsidiaries in which we do not own 100%, and is primarily comprised of Ford's non-controlling interest in our Blue Diamond Parts joint venture. Q4: What are your expected 2018 and beyond pension funding requirements? A: For the three and nine months ended July 31, 2018, we contributed $25 million and $78 million respectively, to our U.S. and Canadian pension plans (the "Plans") to meet regulatory minimum funding requirements. We currently anticipate additional contributions of approximately $54 million during the remainder of 2018. Future contributions are dependent upon a number of factors, principally the changes in values of plan assets, changes in interest rates, and the impact of any future funding relief. We currently expect that from 2019 through 2021, we will be required to contribute $140 million to $190 million per year to the Plans, depending on asset performance and discount rates. Q5: What is your expectation for future cash tax payments? A: Our cash tax payments are expected to remain low in 2018 and will gradually increase as we utilize available net operating losses (NOLs) and tax credits in future years. Q3 2018 Earnings – 9/6/2018 NYSE: NAV 15
Frequently Asked Questions Q6: What is the current balance of net operating losses as compared to other deferred tax assets? A: The deferred tax assets were remeasured as of December 22, 2017 as a result of the new U.S. tax legislation. After the remeasurement, the Company had deferred tax assets for U.S. federal NOLs valued at $660 million, state NOLs valued at $196 million, and foreign NOLs valued at $243 million, for a total undiscounted cash value of $1.1 billion. In addition to NOLs, the Company had deferred tax assets for accumulated tax credits of $264 million and other deferred tax assets of $1.2 billion resulting in net deferred tax assets before valuation allowances of approximately $2.5 billion. Of this amount, $2.4 billion was subject to a valuation allowance as of December 22, 2017. Q7: How does your FY 2018 Class 8 industry outlook compare to ACT Research? A: Reconcilation to ACT - Retail Sales 2018 ACT* 288,900 CY to FY Adjustment (11,617) "Other Specialty OEMs" included in ACT's forecast; we do not include (6,000) these specialty OEMs in our forecast or in our internal/external reports Total (ACT comparable Class 8 Navistar) 271,283 Navistar Industry Retail Deliveries Combined Class 8 Trucks 260,000 280,000 Navistar Difference from ACT (11,283) 8,717 *Source: ACT N.A. Commercial Vehicle Outlook - May 2018 (4.2%) 3.2% Q8: Please discuss the process from an order to a retail delivery? A: Orders* are customers’ written commitments to purchase vehicles. Order backlogs* are orders yet to be built as of the end of a period. Chargeouts are vehicles that have been invoiced to customers. Retail deliveries occur when customers take possession and register the vehicle. Units held in dealer inventory represent the principal difference between retail deliveries and chargeouts. * Orders and units in backlog do not represent guarantees of purchases and are subject to cancellation. Q3 2018 Earnings – 9/6/2018 NYSE: NAV 16
Frequently Asked Questions Q9: How do you define manufacturing free cash flow? A: Quarters Ended (in millions) Jul. 31, 2018 Apr. 30, 2018 Jan. 31, 2018 Oct. 31, 2017 July 31, 2017 Consolidated Net Cash from Operating Activities...................... $ (83) $ (21) $ (76) $ 277 $ (61) Less: Net Cash from Financial Services Operations................... 33 (220) 161 87 (95) Net Cash from Manufacturing Operations (A) ....................... (116) 199 (237) 190 34 Capital Expenditures.......................................................................... (25) (23) (30) (9) (27) Manufacturing Free Cash Flow.......................................... $ (141) $ 176 $ (267) $ 181 $ 7 _____________________________ (A) Net of adjustments. Q10: What were your Worldwide Engine Shipments in the period? A: Three Months Ended July 31, % 2018 2017 Change Change (in units) OEM sales-South America................................ 6,500 6,000 500 8% Intercompany sales........................................... 4,300 3,300 1,000 30% Other OEM sales............................................... 800 600 200 33% Total Core Markets.......................... 11,600 9,900 1,700 17% Q3 2018 Earnings – 9/6/2018 NYSE: NAV 17
Outstanding Debt Balances July 31 , October 31, (in millions) 2018 2017 Manufacturing operations Senior Secured Term Loan Credit Facility, due 2025, net of unamortized discount of $7 and unamortized debt issuance costs of $12 .............................................................................................................. $ 1,573 $ — Senior Secured Term Loan Credit Facility, as amended, due 2020, net of unamortized discount of $7 and unamortized debt issuance costs of $9 ............................................................................................ — 1,003 6.625% Senior Notes, due 2026, net of unamortized debt issuance costs of $17 ................................. 1,083 — 8.25% Senior Notes, due 2022 net of unamortized discount of $13, respectively, and unamortized debt issuance costs of $14 .............................................................................................................. — 1,423 4.50% Senior Subordinated Convertible Notes, due 2018, net of unamortized discount of $1 and $5, respectively, and unamortized debt issuance costs of less than $1 and $1, respectively.............. 199 194 4.75% Senior Subordinated Convertible Notes, due 2019, net of unamortized discount of $7 and $14, respectively, and unamortized debt issuance costs of $2 and $3, respectively ............................. 402 394 Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040, net of unamortized debt issuance costs of $5 at both dates .......................................................................................................................... 220 220 Financed lease obligations ........................................................................................................................................ 121 130 Other ................................................................................................................................................................................. 27 43 Total Manufacturing operations debt .................................................................................................................... 3,625 3,407 Less: Current portion ................................................................................................................................................... 661 286 Net long-term Manufacturing operations debt ................................................................................................$ 2,964 $ 3,121 July 31 , October 31 , (in millions) 2018 2017 Financial Services operations Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2023, net of unamortized debt issuance costs of $3 and $5, respectively............................................... $ 888 $ 849 Senior secured NFC Term Loan, due June 2025, net of unamortized discount of $2, and unamortized debt issuance cost of $4…………………………………………………………………………………………… 394 — Bank credit facilities, at fixed and variable rates, due dates from 201 8 through 2024, net of unamortized debt issuance costs of $1 and $2, respectively ........................................................................ 500 616 Commercial paper, at variable rates, program matures in 2022 .................................................................. 88 92 Borrowings secured by operating and finance leases, at various rates, due serially through 2024 105 94 Total Financial Services operations debt .............................................................................................................. 1,975 1,651 Less: Current portion ................................................................................................................................................... 1,046 883 Net long-term Financial Services operations debt ........................................................................................... $ 929 $ 768 Note: Our fiscal year ends on October 31. As such, all references to 2018, 2017, and other years contained within this presentation relate to the fiscal year, unless otherwise indicated. Q3 2018 Earnings – 9/6/2018 NYSE: NAV 18
SEC Regulation G Non-GAAP Reconciliation SEC Regulation G Non-GAAP Reconciliation: The financial measures presented below are unaudited and not in accordance with, or an alternative for, financial measures presented in accordance with U.S. generally accepted accounting principles ("GAAP"). The non-GAAP financial information presented herein should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP and are reconciled to the most appropriate GAAP number below. Earnings (loss) Before Interest, Income Taxes, Depreciation, and Amortization (“EBITDA”): We define EBITDA as our consolidated net income (loss) attributable to Navistar International Corporation, net of tax, plus manufacturing interest expense, income taxes, and depreciation and amortization. We believe EBITDA provides meaningful information regarding the performance of our business and therefore we use it to supplement our GAAP reporting. We have chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of operating results. Adjusted EBITDA and Adjusted EBITDA Margin: We believe that adjusted EBITDA and Adjusted EBITDA margin, which excludes certain identified items that we do not consider to be part of our ongoing business, improves the comparability of year to year results, and is representative of our underlying performance. Management uses this information to assess and measure the performance of our operating segments. We have chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of operating results, to illustrate the results of operations giving effect to the non-GAAP adjustments shown in the below reconciliations, and to provide an additional measure of performance. Manufacturing Cash, Cash Equivalents, and Marketable Securities: Manufacturing cash, cash equivalents, and marketable securities represents the Company’s consolidated cash, cash equivalents, and marketable securities excluding cash, cash equivalents, and marketable securities of our financial services operations. We include marketable securities with our cash and cash equivalents when assessing our liquidity position as our investments are highly liquid in nature. We have chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of our ability to meet our operating requirements, capital expenditures, equity investments, and financial obligations. Gross Margin consists of Sales and revenues, net, less Costs of products sold. Structural Cost consists of Selling, general and administrative expenses and Engineering and product development costs. Manufacturing Free Cash Flow consists of Net cash from operating activities and Capital expenditures. Q3 2018 Earnings – 9/6/2018 NYSE: NAV 19
SEC Regulation G Non-GAAP Reconciliation Manufacturing segment cash, Cash equivalents, and Marketable securities reconciliation: Jul. 31, Apr. 30, Jan. 31, Oct. 31, Jul. 31, (in millions) 2018 2018 2018 2017 2017 Manufacturing Operations: Cash and cash equivalents………………………………………………………............................... $ 989 $ 1,060 $ 671 $ 666 $ 868 Marketable securities……………………………………………………………................................... 95 40 276 370 55 Manufacturing Cash, Cash equivalents, and Marketable securities................ $ 1,084 $ 1,100 $ 947 $ 1,036 $ 923 Financial Services Operations: Cash and cash equivalents………………………………………………………............................... $ 33 $ 40 $ 28 $ 40 $ 43 Marketable securities……………………………………………………………................................... - - - - 7 Financial Services Cash, Cash equivalents, and Marketable securities……..... $ 33 $ 40 $ 28 $ 40 $ 50 Consolidated Balance Sheet: Cash and cash equivalents………………………………………………………............................... $ 1,022 $ 1,100 $ 699 $ 706 $ 911 Marketable securities……………………………………………………………................................... 95 40 276 370 62 Consolidated Cash, Cash equivalents, and Marketable securities…………...... $ 1,117 $ 1,140 $ 975 $ 1,076 $ 973 Q3 2018 Earnings – 9/6/2018 NYSE: NAV 20
SEC Regulation G Non-GAAP Reconciliations Earnings (loss) before interest, taxes, depreciation, and amortization (“EBITDA”) reconciliation Quarters Ended July 31, (in millions) 2018 2017 Income attributable to NIC, net of tax.............................................................................. $ 170 $ 36 Plus: Depreciation and amortization expense................................................................. 51 57 Manufacturing interest expense (A)........................................................................... 60 67 Adjusted for: Income tax expense........................................................................................................... (3) — EBITDA................................................................................................................................................ $ 284 $ 160 ______________________ (A) Manufacturing interest expense is the net interest expense primarily generated for borrowings that support the manufacturing and corporate operations, adjusted to eliminate interest expense of our Financial Services segment. The following table reconciles Manufacturing interest expense to the consolidated interest expense: Quarters Ended July 31, (in millions) 2018 2017 Interest expense.................................................................................................................... $ 82 $ 91 Less: Financial services interest expense.................................................................... 22 24 Manufacturing interest expense..................................................................................... $ 60 $ 67 (in millions) 2018 2017 EBITDA (reconciled above)................................................................................. $ 284 $ 160 Adjusted for significant items of: Adjustments to pre-existing warranties (A)........................................................................ (4) 6 Asset impairment charges (B).................................................................................................... 8 6 Restructuring of manufacturing operations (C) ............................................................... 1 (3) EGR product litigation (D)............................................................................................................ — 31 Gain on sale (E).................................................................................................................................. — (6) Settlement gain (F).......................................................................................................................... (71) — Total adjustments.................................................................................................................................. (66) 34 Adjusted EBITDA.................................................................................................. $ 218 $ 194 Adjusted EBITDA margin................................................................................................................... 8.4% 8.8% For more detail on the items noted, please see the footnotes on slide 22. Q3 2018 Earnings – 9/6/2018 NYSE: NAV 21
Significant Items Included Within Our Results Quarters Ended July 31, (in millions) 2018 2017 Expense (Income): Adjustments to pre-existing warranties (A)........................................................................ $ (4) $ 6 Asset impairment charges (B).................................................................................................... 8 6 Restructuring of manufacturing operations (C) ............................................................... 1 (3) EGR product litigation (D)............................................................................................................ — 31 Gain on sale (E).................................................................................................................................. — (6) Settlement gain (F).......................................................................................................................... (71) — ______________________ (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, we recorded $8 million of impairment charges related to the sale of our railcar business in Cherokee, Alabama, certain long-lived assets and certain assets under operating leases in our Truck and Financial Services segments. In the third quarter of 2017, we recorded $6 million of asset impairment charges relating to assets held for the sale of our Conway, Arkansas fabrication business and for certain assets under operating leases in our Truck segment. (C) In the third quarter of 2018, we recorded a charge of $1 million related to adjustments for restructuring in our Truck, Global Operations and Corporate segments. In the third quarter of 2017, we recorded a benefit of $3 million for restructuring in our Truck segment. We recorded $41 million of charges related to our plan to cease production at our Melrose Park Facility, a net benefit of $43 million related to the resolution of the closing agreement for our Chatham, Ontario plant, and the release of $1 million in OPEB liabilities in connection with the sale of our fabrication business in Conway, Arkansas. (D) In the third quarter of 2017, we recognized a charge of $31 million for a jury verdict related to the Maxxforce engine EGR product 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 third quarter of 2018, we settled a business economic loss claim relating to our Alabama engine manufacturing facility in which we will receive a net present value of $70 million, net of our fees and costs, from the Deepwater Horizon Settlement Program. We recorded the $70 million net present value of the settlement and related interest income of $1 million in Other Income, net. Q3 2018 Earnings – 9/6/2018 NYSE: NAV 22