10-K 1 nav10k2013.htm 10-K NAV 10K 2013
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to        
   Commission file number 1-9618
___________________________________________________

 
NAVISTAR INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________________
Delaware
 
36-3359573
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2701 Navistar Drive, Lisle, Illinois
 
60532
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (331) 332-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class 
 
Name of each exchange on which registered
Common stock (par value $0.10)
 
New York Stock Exchange
Cumulative convertible junior preference stock, Series D (par value $1.00)
 
New York Stock Exchange
Preferred stock purchase rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No   o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
þ
  
Accelerated filer
 
o
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
(Do not check if a smaller reporting company)
  
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  þ
As of April 30, 2013, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $1.8 billion. For purposes of the foregoing calculation only, executive officers and directors of the registrant, 10% or greater stockholders, and pension and 401(k) plans of the registrant have been deemed to be affiliates.
As of November 30, 2013, the number of shares outstanding of the registrant’s common stock was 81,176,313, net of treasury shares.
Documents incorporated by reference: Portions of the Company's proxy statement for the 2014 annual meeting of stockholders to be held on March 10, 2014 are incorporated by reference in Part III.
 
 
 
 
 




NAVISTAR INTERNATIONAL CORPORATION FISCAL YEAR 2013 FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
PART I
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
 
PART III
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
 
 
 
PART IV
 
 
Item 15.
 
 
 
 
 
 
 
EXHIBIT INDEX:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Disclosure Regarding Forward-Looking Statements
Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements only speak as of the date of this report and Navistar International Corporation assumes no obligation to update the information included in this report.
Such forward-looking statements include, but are not limited to, statements concerning:
estimates we have made in preparing our financial statements;
our development of new products and technologies;
anticipated sales, volume, demand, and markets for our products;
anticipated performance and benefits of our products and technologies, including our advanced clean engine solutions;
our business strategies relating to, and our ability to meet, federal and state regulatory heavy-duty diesel emissions standards applicable to certain of our engines, including the timing and costs of compliance and consequences of noncompliance with such standards, as well as our ability to meet other federal, state and foreign regulatory requirements;
our business strategies and long-term goals, and activities to accomplish such strategies and goals;
our expectations to achieve the objectives of our "Drive-to-Deliver" turnaround plan, including: (i) leading vehicle uptime, (ii) creating a lean enterprise, (iii) generating future financial growth, and (iv) improving market share profitably;
anticipated results from our Return-on-Invested-Capital ("ROIC") methodology and the benchmarking study to create a pathway to achieve profitability;
anticipated results from the realignment of our leadership and management structure;
anticipated benefits from acquisitions, strategic alliances, and joint ventures we complete;
our expectations relating to the dissolution of our Blue Diamond Truck joint venture with Ford Motor Company ("Ford") expected in February 2015;
our expectations and estimates relating to restructuring activities, including restructuring and integration charges and timing of cash payments related thereto, and operational flexibility, savings, and efficiencies from such restructurings;
our expectations relating to the possible effects of anticipated divestitures and closures of businesses;
our expectations relating to our cost-reduction actions, including our enterprise-wide reduction-in-force, and other actions to reduce discretionary spending;
our expectations relating to our ability to service our long-term debt;
our expectations relating to our retail finance receivables and retail finance revenues;
our anticipated costs relating to the development of our emissions solutions products and other product modifications that may be required to meet other federal, state, and foreign regulatory requirements;
our anticipated capital expenditures;
our expectations relating to payments of taxes;
our expectations relating to warranty costs;
our expectations relating to interest expense;
costs relating to litigation and similar matters;
estimates relating to pension plan contributions and unfunded pension and postretirement benefits;
trends relating to commodity prices; and
anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations.
These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to differences in our future financial results include those discussed in Item 1A, Risk Factors, set forth in Part I, as well as those discussed elsewhere in this report. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.

3


Available Information
We are subject to the reporting and information requirements of the Exchange Act and as a result, are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the United States ("U.S.") Securities and Exchange Commission ("SEC"). We make these filings available free of charge on our website (http://www.navistar.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Annual Report on Form 10-K. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC. Any materials we file with, or furnish to, the SEC may also be read and/or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

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PART I
Item 1.
Business
Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating subsidiaries are Navistar, Inc. and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer to NIC and its subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We report our annual results for our fiscal year, which ends October 31. As such, all references to 2013, 2012, and 2011 contained within this Annual Report on Form 10-K relate to the applicable fiscal year unless otherwise indicated.
Overview
We are an international manufacturer of International® brand commercial and military trucks, MaxxForce® brand diesel engines, IC Bus™ ("IC") brand school and commercial buses, as well as a provider of service parts for trucks and diesel engines. We also provide retail, wholesale, and lease financing services for our trucks and parts.
Our Products and Services
Our principal products and services include:
Trucks—We manufacture and distribute Class 4 through 8 trucks and buses in the common carrier, private carrier, government, leasing, construction, energy/petroleum, military vehicle, and student and commercial transportation markets under the International and IC brands.
Parts—We support our International brand commercial and military trucks, IC brand buses, MaxxForce engines, as well as our other product lines, by distributing proprietary products together with a wide-selection of other standard truck, trailer, and engine service parts.
Engines—We design and manufacture diesel engines across the 50 through 550 horsepower range under the MaxxForce and MWM brand names. In North America, our engines are primarily used in our International branded trucks and military vehicles and IC branded buses. In Brazil, in addition to the MWM brand, we also produce mid-range diesel engines primarily under contract manufacturing arrangements for sale to original equipment manufacturers ("OEMs") in South America. We also manufacture diesel engines for the pickup truck, van, and sport-utility vehicle ("SUV") markets.
Financial Services—We provide retail, wholesale, and lease financing of products sold by the North America Truck and North America Parts segments, as well as their dealers, within the U.S. and Mexico.
Our Guiding Principles
Our goal is to be the commercial vehicle leader in our primary traditional markets of North American Class 6 through 8 trucks and buses. We believe the following six guiding principles will be the key to achieving our goal:
Customer satisfaction—We strive to provide the highest level of customer satisfaction in the industry through improving the uptime of our products while reducing the lifetime costs of operation.
Great products—We seek to leverage our knowledge of customer requirements to deliver products and services that meet our customers’ evolving needs.
Quality—We are driven to be the market leader in quality, and have implemented quality improvement actions across our enterprise, targeting all stages of the product life cycle, from design, validation, and testing to manufacturing and through to customer service.
Reduced cost—We are focused and committed to becoming a lean enterprise through eliminating non-value added activities and reducing our overall cost structure to improve profitability at all stages of the industry cycle.
People—We facilitate organizational integration through our "One Navistar" initiative, in order to maximize the potential of our workforce and unite our efforts around common goals, resulting in a high performance organization.
Urgency—We act with a sense of urgency across our entire organization. The "Navistar way" is embodied by our efforts to become a faster, more efficient, and more focused organization.

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Our Strategy
Our Business
Our core business is the North American truck and parts markets, where we participate primarily in the Class 6 through 8 vehicle market segments (our "Traditional" markets). Historically, we had success in the truck and bus markets due to the integration of our engines in these vehicles. In 2009, we expanded our engine offering to include certain heavy-duty big-bore engines under the MaxxForce brand. We believed that vertically integrating our engines and trucks in certain markets would be the best method to differentiate our products, create value, and provide an expanded stream of revenue for service parts over the life cycle of the vehicle.
Emissions regulation is a key element of our industry. A fundamental component of our prior strategy was to leverage Advanced Exhaust Gas Recirculation ("EGR"), which we believed to have certain advantages, as part of a proprietary engine technology path. We previously believed that our proprietary engine technology would eliminate the need for additional after-treatment components on our vehicles, including urea-based Selective Catalytic Reduction ("SCR"). However, in July 2012, we announced a change to our engine emissions strategy. We aggressively pursued the technology path followed by others in the industry by adding SCR components to our engines and our vehicles, and as a result, in 2013, we received Environmental Protection Agency ("EPA") certification of certain of our MaxxForce engines that incorporate an SCR after-treatment system.
In addition to modifying our technology path related to emissions standards, we decided to discontinue the development of certain engines without scale, in favor of a more cost-effective method of purchasing certain engines from an engine OEM supplier. During 2013, we began offering trucks with these engines. Our primary focus is to execute the refresh of our product portfolio that incorporates our new engine strategy and improvements to the quality of our products. We redeployed a substantial portion of our resources to focus on this effort and our primary market of North America. We believe that: (i) offering our trucks with the option of being powered by either our MaxxForce engine or a 3rd party engine will allow us to increase our customer-base; and (ii) our products will demonstrate superior performance as measured by uptime, fuel economy, and lowest cost of ownership. All together, we believe this strategy will ultimately translate into successfully recapturing market share in North America.
We implemented a Return-on-Invested-Capital ("ROIC") methodology, combined with an assessment of the strategic fit to our core business, to identify areas that are under-performing or are non-strategic. We are working to fix, divest or close under-performing and non-strategic areas and expect to realize incremental benefits from these actions in the near future. In addition, we are restructuring our business and rationalizing our Manufacturing operations in an effort to optimize our cost structure. This effort is ongoing, and may lead to additional divestitures of businesses or discontinuing engineering programs that are outside of our core operations or not performing to our expectations. We also initiated a benchmarking study to create a pathway to achieve profitability at all points of the industry cycle by identifying actions to lower our material and manufacturing costs, resulting in significant cost savings. We believe that actions identified by our ROIC evaluation initiative and benchmarking study will translate into a more efficient company with a lower cost structure, ultimately leading to increased profitability.
We have taken several actions that we believe will improve our performance and continue to evaluate additional opportunities to enhance value. Following our six guiding principles, the entire organization remains aligned around our "Drive-to-Deliver" turnaround plan, which is outlined below under Our 2013 Accomplishments and Our Expectations Going Forward.
Our 2013 Accomplishments
Following our Drive-to-Deliver plan, we made substantial progress during 2013 on our top priorities:
I.
Improve quality—We moved with urgency to address quality issues in our existing product portfolio, as well as implemented new quality controls and testing systems. For example, during 2013, we logged nearly four million test miles on the International® ProStar® trucks powered by our Certified MaxxForce 13L engine (defined below).
II.
Hit our launches—We achieved several milestones, which included achieving EPA certification using an existing SCR technology, getting to market products that incorporate existing SCR technology while expanding our engine options, and revamping our heavy-duty truck portfolio. Specific examples include:
We met our first major engine strategy milestone with the launch of certain Class 8 truck models featuring the Cummins ISX15 engine, which includes their after-treatment system, in December 2012.
In April, we met another major engine strategy milestone with the receipt of EPA certification of our MaxxForce 13L Big-Bore engines incorporating the Cummins SCR after-treatment system (the "Certified MaxxForce 13L engine"). Later in that same month, we began shipping our International® ProStar® trucks powered by our Certified MaxxForce 13L engine. Also in April, we received on-board diagnostics ("OBD") certification for all current applications.

6


III.
Deliver on our 2013 plan—We demonstrated discipline with regards to the cash of our Manufacturing operations, where we met our guidance each quarter of 2013. We made tough decisions to reduce operating costs and made significant progress on our benchmarking study and ROIC evaluation initiative. We changed our leadership, which resulted in blending our internal expertise with an outside perspective.
In 2012, we implemented a number of cost-reduction actions to control spending across the Company, including reductions in discretionary spending and employee headcount reductions. As a result, our operating costs, which include selling, general and administrative ("SG&A") expenses and engineering and product development costs, decreased by $330 million in 2013, compared to the prior year. Also throughout 2013, we initiated various additional cost-reduction actions that were identified by our benchmarking study. Specifically in September, we leveraged efficiencies identified through redesigning our organizational structure and began implementing new cost-reduction initiatives, including an enterprise-wide reduction-in-force, which we expect will contribute an estimated $50 million to $60 million of annual savings beginning in 2014.
The ROIC evaluation initiative drove our decisions to divest: (i) our interests in Mahindra Navistar Automotives Ltd. and Mahindra-Navistar Engines Private Ltd. (collectively, the "Mahindra Joint Ventures") in February, (ii) the Workhorse Custom Chassis ("WCC") business in March, (iii) substantially all of our interest in certain operations of the Monaco RV business in May, and (iv) the Bison Coach trailer manufacturing business ("Bison Coach") in October. We also entered into an agreement to sublease a portion of our manufacturing facility in Cherokee, Alabama. Additionally, we began rationalizing certain engineering and product development programs, due in part to changes in our engine strategy and renewed focus on our core business of the North American truck and bus markets.
In connection with our renewed focus on the North America market, we have realigned our leadership and management structure around functional expertise. We believe this realignment will result in better execution of our strategies by facilitating faster decision making, driving greater accountability and transparency, creating better alignment towards common objectives, and reducing our operating costs. As a result of the progress we have made with this realignment, we determined our reporting segments changed in the fourth quarter of 2013.
IV.
Build sales momentum—In our Traditional markets, we have seen a strong response to our new truck offerings. As of October 31, 2013, our backlog of unfilled truck orders in our Traditional markets increased by 26% compared to October 31, 2012. We have seen an increase in our order share in the second half of 2013 compared to the first half of the year. We believe this momentum will continue to be fueled by offering the Cummins ISB 6.7 liter engine (the "Cummins ISB") in our International® DuraStar® medium-duty trucks and IC Bus™ CE Series school buses. Initial production of DuraStar® and CE Series school buses, incorporating the Cummins ISB, is expected to begin during our first quarter of 2014.
Our Expectations Going Forward
We believe we are well-positioned to build upon our 2013 accomplishments and take them to the next level:
I.
Lead in vehicle uptime—Quality remains at the forefront of our customer-focused approach. We believe our quality will continue to improve and our trucks will be market leaders in uptime and fuel economy with the lowest cost of ownership. Going forward, we believe we are building the best trucks in our Company's history.
II.
Lean enterprise—We are utilizing a customer-focused redesign of our trucks to find new ways to reduce costs and add value for our customers. We are eliminating waste and driving functional excellence to achieve continuous improvement. We expect these steps will build customer satisfaction, lower our break-even point, and drive profitability at all points in the cycle.
III.
Financial growth—We expect the increases seen in our orders and backlogs in our Traditional markets will translate to increased volumes and market share in the future. Due to our focus on reducing costs through manufacturing optimization, eliminating waste, and addressing the opportunities identified by benchmarking studies, we expect to lower manufacturing costs, increase capacity utilization and productivity, and achieve a lower cost structure. We also expect to continue to enhance our liquidity and profitability. As a result of these actions, we expect to improve our financial performance and achieve our long-term financial goals.
IV.
Profitable improvements in market share—We expect the sales momentum that began in late 2013 to continue with new and improved products, volume growth, and effective pricing. We intend to move steadily closer towards having a full-product portfolio with the SCR after-treatment technology. We expect to continue our product differentiation with enhanced features and options that will benefit our customers and help drive profitable market share improvements.

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Our Operating Segments
In 2013, we continued our ongoing efforts to realign our management structure around the functional expertise needed to execute our core North American strategy. We believe these realignments, among other things, will result in better execution of our strategies, streamline the decision making process, create better alignment towards a common objective, and reduce our operating costs. In the fourth quarter of 2013, we completed certain changes to our organizational and reporting structures that reflect how our Chief Executive Officer, is who our Chief Operating Decision Maker, assesses the performance of our operating segments and makes decisions about resource allocations.
As a result, we have determined our reporting segments consist of: North America Truck, North America Parts, Global Operations (collectively referred to as "Manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively referred to as "Financial Services operations"). Corporate contains those items that do not fit into our four segments. Selected financial data for each segment, as well as information relating to customer concentration, can be found in Note 16, Segment Reporting, to the accompanying consolidated financial statements. Prior to the fourth quarter of 2013, our reporting segments consisted of: Truck, Engine, Parts, and Financial Services.
North America Truck Segment
Our North America Truck segment manufactures and distributes Class 4 through 8 trucks, buses, and military vehicles under the International and IC brands, along with production of engines under the MaxxForce brand name, in the North America markets that include sales in the U.S., Canada, and Mexico. Our North America Truck segment also produces concrete mixers under the Continental Mixers brand and refuse truck bodies under the E-Z Pack brand. The engines produced in North America are primarily used in our trucks and buses. Our strategy is to deliver the highest quality commercial trucks, buses, and military vehicles. The North America Truck segment is our largest operating segment based on total external sales and revenues.
We compete primarily in our Traditional markets. The North America Truck segment's manufacturing operations in the U.S. and Mexico consist principally of assembling components manufactured by our suppliers, as well as designing, engineering, and producing certain sheet metal components, including truck cabs, and MaxxForce engines. In 2013, we began offering the Cummins ISX15 engine, as well as the Cummins SCR after-treatment system on certain applications of our MaxxForce branded engines. In 2014, we expect to begin offering the Cummins ISB engine in certain truck and bus applications. The products we sell to the U.S. military are derivatives of our commercial vehicles and allow us to leverage our manufacturing and engineering expertise, utilize existing plants, and seamlessly integrate our engines into the military vehicle. We also sell International and CAT branded trucks through our alliance with Caterpillar Inc. ("Caterpillar").
Through Blue Diamond Truck Co. LLC ("BDT"), our joint venture with Ford, we manufacture certain Ford and Navistar medium-duty trucks. In December 2011, Ford notified the Company of its intention to dissolve BDT, effective December 2014. However, in September 2013, Ford and the Company agreed to extend the BDT joint venture through February 2015.
The North America Truck segment's manufacturing operations also include the production of diesel engines, which are primarily used in our trucks, and include Pure Power Technologies Metalcastings ("PPT"), which consists of: (i) a components business focused on air and fuel systems, and (ii) foundry operations that manufacture engine components, mainly cylinder blocks, heads, and other engine components. The operations at the engine manufacturing facilities consist principally of the assembly of components manufactured by PPT and our suppliers, as well as machining operations relating to steel and grey-iron components, and certain higher technology components necessary for our engine operations.
We market our commercial products through our extensive independent dealer network in North America, which offers a comprehensive range of services and other support functions to our end users. Our commercial trucks are distributed in virtually all key markets through our distribution and service network retail outlets, which is comprised of 797 outlets in the U.S. and Canada and 80 outlets in Mexico, as of October 31, 2013. We occasionally acquire and operate dealer locations ("Dealcors") for the purpose of transitioning ownership. As of October 31, 2013, we operated three Dealcors. In addition, our network of used truck centers and International certified used truck dealers in the U.S. and Canada provides trade-in support to our dealers and national accounts group, and markets all makes and models of reconditioned used trucks to owner-operators and fleet buyers.
The markets in which the North America Truck segment competes are subject to considerable volatility and fluctuation in response to cycles in the overall business environment. These markets are particularly sensitive to the industrial sector, which generates a significant portion of the freight tonnage hauled. Government regulation has also impacted, and will continue to impact, trucking operations as well as the efficiency and specifications of trucking equipment.
The Class 4 through 8 truck and bus markets in North America are highly competitive. Major U.S.-controlled domestic competitors include PACCAR Inc. ("PACCAR"), which sells vehicles under the Kenworth and Peterbilt nameplates in North America, and Ford. Competing foreign-controlled domestic manufacturers include Freightliner and Western Star (both subsidiaries of Daimler-Benz AG ("Mercedes Benz")), Volvo and Mack (both subsidiaries of Volvo Global Trucks), and Hino (a

8


subsidiary of Toyota Motor Corporation ("Toyota")). Major U.S. military vehicle competitors include BAE Systems, Force Protection, Inc., General Dynamics Land Systems, and Oshkosh Truck. In addition, smaller, foreign-controlled market participants such as Isuzu Motors America, Inc. ("Isuzu"), UD Trucks North America (a subsidiary of AB Volvo ("UD Trucks")), and Mitsubishi Motors North America, Inc. ("Mitsubishi") are competing in the U.S. and Canadian markets with primarily imported products. In Mexico, the major domestic competitors are Kenmex (a subsidiary of PACCAR) and Mercedes Benz. In the Mexican diesel engine market, our Classes 4 through 8 trucks with our MaxxForce 4.8L, 7L, DT, and 9L engines, face competition from Cummins, Isuzu, Hino, Mercedes Benz, and Ford.
North America Parts Segment
Our North America Parts segment supports our brands of International commercial and military trucks, IC buses, MaxxForce engines, as well as our other product lines, by providing customers with proprietary products together with a wide selection of other standard truck, trailer, and engine service parts. We distribute service parts in North America through the dealer network that supports our trucks and engines. The North America Parts segment is our second largest operating segment based on total external sales and revenues.
We believe our extensive dealer channel provides us with an advantage in serving our customers by having our parts available when and where our customers require service. Goods are delivered to our customers either through one of our eleven regional parts distribution centers in North America or through direct shipment from our suppliers. We have a dedicated parts sales team within North America, as well as national account teams focused on large fleet customers, and a government and military team. In conjunction with the Truck sales and technical service group, we provide an integrated support team that works to find solutions to support our customers.
Also included in the North America Parts segment is our Blue Diamond Parts ("BDP") joint venture with Ford, which manages the sourcing, merchandising, and distribution of certain service parts for North American Ford vehicles.
The North America Parts business competes on many dimensions including customer service, price, ease-of-doing-business, and parts availability. We sell a substantial amount of all-make parts for light-, medium- and heavy-duty trucks, which are common across OEM truck manufacturers ("All-Make parts"). The dealers and fleets have multiple outlets to purchase All-Make parts including other OEMs (including but not limited to Freightliner, PACCAR, Mack and Volvo), independent distributors, and traditional retail outlets. We sell a wide-range of proprietary parts, however, we are subject to varying degrees of competition for many of our proprietary parts from alternative parts-providers and independent remanufacturers.
Global Operations Segment
Our Global Operations segment includes businesses that derive their revenue from outside our core North America markets and primarily consists of the operations of our wholly-owned subsidiary, International Indústria de Motores da América do Sul Ltda. ("IIAA") (formerly MWM International Industria De Motores Da America Do Sul Ltda. ("MWM")) in Brazil and our truck and parts export businesses under the International and IC brands. IIAA is a leader in the South American mid-range diesel engine market, manufacturing and distributing mid-range diesel engines and providing customers with additional engine offerings in the agriculture, marine, and light truck markets. Additionally, we also sell our engines to global OEMs for various on-and-off-road applications. We offer contract manufacturing services under the MWM brand to OEMs for the assembly of their engines, particularly in South America. Additionally as part of its MWM operations, the Global Operations segment has engine manufacturing operations in Argentina. We continue to develop our Expansion markets, which include international export and other truck and bus markets. The Global Operations segment is our third largest operating segment based on total external sales and revenues.
Our commercial products are marketed through our independent dealer network, which offers a comprehensive range of services and other support functions to our end users. Our commercial trucks are distributed in certain markets through our distribution and service network of retail outlets, which was comprised of 304 international locations, as of October 31, 2013. We distribute service parts internationally through our dealer network, as well as through direct shipments.
From time to time, we enter into collaborative strategic relationships that allow us to generate manufacturing efficiencies, economies of scale, and market growth opportunities. The Global Operations segment has engaged in various strategic joint ventures to further our reach to global markets, which include our joint venture in China with Anhui Jianghuai Automobile Co ("JAC"). In August 2012, the Company and JAC received formal approval from the Chinese government to move forward with their commercial engine joint venture. The joint venture will focus on meeting the emerging needs of the Chinese commercial truck market by providing JAC with access to Navistar's Euro IV and Euro V emission standard technologies. In May 2013, the engine joint venture with JAC was capitalized and became operational. The joint venture also sets the stage for global export opportunities of JAC's light-, medium- and heavy-duty commercial trucks. The joint venture related to truck opportunities is subject to finalization of certain ancillary agreements among the parties and governmental approval.

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In Brazil, IIAA engine competes with Mitsubishi and Toyota in the Mercosul pickup and SUV markets; Cummins, Mercedes Benz, and Fiat Powertrain ("FPT") in the light and medium markets; Mercedes Benz, Cummins, Scania, MAN, Volvo, and FPT in the heavy market; Mercedes Benz in the bus market; New Holland (a subsidiary of CNH Global N.V.), Sisu Diesel (a subsidiary of AGCO Corporation), and Deere & Company in the agricultural market; and Scania and Cummins in the stationary market. In our primary truck and parts export markets of South America, we compete with many truck manufacturers, including PACCAR, Freightliner, and Mack.
Financial Services Segment
Our Financial Services segment provides and manages retail, wholesale, and lease financing of products sold by the North America Truck and Parts segments and their dealers within the U.S. and Mexico. Substantially all revenues earned by the Financial Services segment are derived from supporting the sales of our vehicles and products. We also finance wholesale and retail accounts receivable, of which substantially all revenues earned are received from financing the sales of our trucks and parts. The Financial Services segment continues to meet the primary goal of providing and managing financing to our customers in U.S. and Mexico markets by arranging cost-effective funding sources, while working to mitigate credit losses and impaired vehicle asset values. This segment provided wholesale financing for 85% and 88% of our new truck inventory sold by us to our dealers and distributors in the U.S. in 2013 and 2012, respectively.
The Financial Services segment manages the relationship with Navistar Capital (an alliance with GE Capital) which provides retail financing to our customers in the U.S. GE Capital has provided financing to support the sale of our products in Canada for over 20 years. This segment is also facilitating financing relationships in other countries to align with the Company's global operations.
In March 2010, we entered into an Operating Agreement, which is subject to early termination provisions, with GE Capital Corporation and GE Capital Commercial, Inc. (collectively "GE") (the "GE Operating Agreement"). Under the terms of the GE Operating Agreement, GE became our preferred source of retail customer financing for equipment offered by us and our dealers in the U.S. We provide GE a loss sharing arrangement for certain credit losses, and under limited circumstances NFC retains the rights to originate retail customer financing.
Government Contracts
As a U.S. government contractor, we are subject to specific regulations and requirements as mandated by our contracts. These regulations include Federal Acquisition Regulations, Defense Federal Acquisition Regulations, and the Code of Federal Regulations. We are also subject to routine audits and investigations by U.S. government agencies such as the Defense Contract Management Agency and Defense Contract Audit Agency. These agencies review and assess compliance with contractual requirements, cost structure, cost accounting, and applicable laws, regulations, and standards.
A portion of our existing U.S. government contracts extend over multiple years and are conditioned upon the continuing availability of congressional appropriations. In addition, our U.S. government contracts generally permit the contracting government agency to terminate the contract, in whole or in part, either for the convenience of the government or for default based on our failure to perform under the contract.
Engineering and Product Development
Our engineering and product development programs are focused on product improvements, innovations, and cost-reductions, and these related costs are incurred by our North America Truck and Global Operations segments. Recently as part of our ROIC initiative, we began rationalizing certain engineering and product development programs based on changes in our engine strategy and renewed focus on our core business of the North American truck and bus markets. For example, we are focused on: (i) further developing our International brand commercial trucks and military trucks, (ii) modifying our trucks to accommodate our MaxxForce engines with the Cummins' SCR after-treatment system, and (iii) integrating the Cummins ISB and ISX15 engines. As a diesel engine manufacturer, we have incurred research, development, and tooling costs to design our engine product lines to meet emissions regulatory requirements and to provide engine solutions to support a global marketplace. The Company participates in very competitive markets with constant changes in regulatory requirements and technology and, accordingly, the Company continues to believe that a strong commitment to engineering and product development is required to drive long-term growth. Our engineering and product development expenditures were $406 million in 2013 compared to $532 million in 2012 and $520 million in 2011.
Backlog
We define order backlogs ("backlogs") as orders yet to be built as of the end of the period. Our backlogs do not represent guarantees of purchases by customers or dealers and are subject to cancellation.

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The following table provides our worldwide backlog of unfilled truck orders as of October 31, 2013 and 2012:
 
Units
 
Value
As of October 31:
 
 
(in billions)
2013
24,000

 
$
1.8

2012
25,000

 
1.8

The decrease in the backlog of unfilled truck orders was primarily due to declines in our global export markets, partially offset by an increase in our Traditional markets, particularly Class 8 heavy trucks. The backlog of unfilled truck orders for our Traditional markets were 22,500 units as of October 31, 2013, an increase of 4,700 units, or 26%, as compared to 17,800 units as of October 31, 2012.
Production of our October 31, 2013 backlog is expected to be substantially completed during 2014. Although the backlog of unfilled orders is one of many indicators of market demand, other factors such as changes in production rates, internal and supplier available capacity, new product introductions, and competitive pricing actions may affect point-in-time comparisons.
Employees
As our business requirements change, fluctuations may occur within our workforce from year to year. In 2013, we leveraged efficiencies identified through redesigning our organizational structure and began implementing new cost-reduction initiatives, including an enterprise-wide reduction-in-force. Also in 2013, we sold the WCC, Bison Coach, and Monaco RV businesses. In August 2012, the Company announced the offering to the majority of our U.S.-based non-represented salaried employees the opportunity to apply for a voluntary separation program ("VSP"). Along with the employees who chose to participate in the VSP, we also used attrition and an involuntary reduction-in-force to eliminate additional positions in order to meet our targeted reductions goal. In addition to these actions in the U.S., our Brazilian operations utilized an involuntary reduction in force to eliminate certain positions. Approximately 1,300 employees were impacted by these actions, of which 1,200 employees exited by October 31, 2012 and the remaining exited in 2013. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
The following tables summarize the number of employees worldwide as of the dates indicated and an additional subset of active union employees represented by the United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW"), and other unions, for the periods as indicated:
 
As of October 31,  
 
2013
 
2012
 
2011
Employees worldwide:
 
 
 
 
 
Total active employees
14,800

 
16,900

 
19,000

Total inactive employees(A) 
1,700

 
1,600

 
1,800

Total employees worldwide
16,500

 
18,500

 
20,800

Total active union employees:
 
 
 
 
 
Total UAW
2,300

 
1,700

 
2,000

Total other unions
2,800

 
2,500

 
3,900

__________________ 
(A)
Employees are considered inactive in certain situations including disability leave, leave of absence, layoffs, and work stoppages. Included within inactive employees are approximately 500 employees, 600 employees, and 1,000 employees as of October 31, 2013, 2012, and 2011, respectively, represented by the National Automobile, Aerospace and Agricultural Implement Workers of Canada ("CAW") at our Chatham, Ontario heavy truck plant related to the expiration of the CAW contract on June 30, 2009. In 2011, the Company committed to close this facility due to an inability to reach a collective bargaining agreement with the CAW. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Our current master collective bargaining agreement with the UAW will expire in October 2014. See Item 1A, Risk Factors, for further discussion related to the risk associated with labor and work stoppages.
Patents and Trademarks
We seek and obtain patents on our inventions and own a significant patent portfolio. Additionally, many of the components we purchase for our products are protected by patents that are owned or controlled by the component manufacturer. We have licenses under third-party patents relating to our products and their manufacture and grant licenses under our patents. The monetary royalties paid or received under these licenses are not material.
Our primary trademarks are an important part of our worldwide sales and marketing efforts and provide instant identification of our products and services in the marketplace. To support these efforts, we maintain, or have pending, registrations of our primary trademarks in those countries in which we do business or expect to do business. We grant licenses under our

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trademarks for consumer-oriented goods, such as toy trucks and apparel, outside the product lines that we manufacture. The monetary royalties received under these licenses are not material.
Supply
We purchase raw materials, parts, and manufactured components from numerous third-party suppliers. To avoid duplicate tooling expenses and to maximize volume benefits, single-source suppliers fill a majority of our requirements for parts and manufactured components.
The impact of an interruption in supply will vary by commodity and type of part. Some parts are generic to the industry while others are of a proprietary design requiring unique tooling, which require additional effort to relocate. However, we believe our exposure to a disruption in production as a result of an interruption of raw materials and supplies is no greater than the industry as a whole. In order to alleviate losses resulting from an interruption in supply, we maintain contingent business interruption insurance for loss of earnings and/or extra expense directly resulting from physical loss or damage at a direct supplier location.
While we believe we have adequate assurances of continued supply, the inability of a supplier to deliver could have an adverse effect on production at certain of our manufacturing locations.
The Company’s costs for trucks and parts sold consist primarily of material costs which are influenced by commodities prices such as steel, precious metals, resins, and petroleum products. We continue to look for opportunities to mitigate the effects of market-based commodity cost increases through a combination of design changes, material substitution, alternate supplier resourcing, global sourcing efforts, and hedging activities. The objective of this strategy is to ensure cost stability and competitiveness in an often volatile global marketplace. Generally, the impact of commodity costs fluctuation in the global market will be reflected in our financial results on a delayed basis, depending on many factors including the terms of supplier contracts, special pricing arrangements, and any commodity hedging strategies employed.
Impact of Government Regulation
Truck and engine manufacturers continue to face significant governmental regulation of their products, especially in the areas of environmental and safety matters. New on-highway emissions standards commenced in the U.S. on January 1, 2007, which reduced allowable particulate matter and allowable nitrogen oxide ("NOx") and have reached the last phase-in period effective with engine model year 2010. This change in emissions standards resulted in a significant increase in the cost of our products to meet these emissions levels.
In 2010, the initial phase-in of OBD requirements commenced for the initial family of truck engines and those products have been certified. The phase-in for the remaining engine families occurred in 2013. Canadian heavy-duty engine emissions regulations essentially mirror those of the EPA. In Mexico, we offer EPA 2004 and Euro IV engines that comply with current standards in that country.
Truck manufacturers are also subject to various noise standards imposed by federal, state, and local regulations. The engine is one of a truck's primary sources of noise, and we therefore work closely with OEMs to develop strategies to reduce engine noise. We are also subject to the National Traffic and Motor Vehicle Safety Act ("Safety Act") and Federal Motor Vehicle Safety Standards ("Safety Standards") promulgated by the National Highway Traffic Safety Administration ("NHTSA").
Government regulation related to climate change is under consideration at the U.S. federal and state levels. Because our products use fossil fuels, they may be impacted indirectly due to regulation, such as a cap and trade program, affecting the cost of fuels. The EPA and NHTSA issued final rules for greenhouse gas emissions and fuel economy on September 15, 2011. These begin to apply in calendar year 2014 and will be fully implemented in model year 2017. The agencies' stated goals for these rules were to increase the use of currently existing technologies. The Company plans to comply with these rules through use of existing technologies and implementation of emerging technologies as they become available. Several of the Company's vehicles have been certified early for the 2013 model year with the remaining vehicles and all engines required to be certified in 2014. The next phase of federal greenhouse gas emission and fuel economy regulations, anticipated for 2020, is also under discussion among the relevant agencies, manufacturers, including the Company, and other stakeholders. Canada adopted its version of fuel economy and/or greenhouse gas emission regulations in February 2013. These regulations are substantially aligned with U.S. fuel economy and greenhouse gas emission regulations. California is also in the initial stages of considering greenhouse gas emission rules for heavy duty vehicles. We expect that heavy duty vehicle and engine fuel economy and greenhouse gas emissions rules will be under consideration in other global jurisdictions in the future. These standards will impact development and production costs for vehicles and engines. There will also be administrative costs arising from the implementation of the rules.
Our facilities may be subject to regulation related to climate change and climate change itself may also have some impact on the Company's operations. However, these impacts are currently uncertain and the Company cannot predict the nature and scope of those impacts.

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Executive Officers of the Registrant
The following selected information for each of our current executive officers (as defined by regulations of the SEC) was prepared as of November 30, 2013.
Name
 
Age
 
Position with the Company
 
 
 
 
 
Troy A. Clarke
 
58
 
President and Chief Executive Officer and Director
Walter G. Borst
 
52
 
Executive Vice President and Chief Financial Officer
Jack Allen
 
56
 
Executive Vice President and Chief Operating Officer
Eric Tech
 
50
 
Senior Vice President, Strategy and Planning, & President, Global and Specialty Business
Steven K. Covey
 
62
 
Senior Vice President, Chief Ethics Officer and General Counsel
James M. Moran
 
48
 
Senior Vice President and Treasurer
Richard C. Tarapchak
 
48
 
Senior Vice President and Corporate Controller
Curt A. Kramer
 
45
 
Corporate Secretary
Gregory W. Elliott
 
52
 
Senior Vice President, Human Resources and Administration
Troy A. Clarke has served as President and Chief Executive Officer of NIC and as a member of our board of directors since April 2013. Mr. Clarke served as President and Chief Operating Officer of NIC from August 2012 to April 2013. Prior to this position, Mr. Clarke served at Navistar, Inc. as President of the Truck and Engine Group from June to August 2012, as President of Asia-Pacific Operations of Navistar, Inc. from 2011 to 2012, and as Senior Vice President of Strategic Initiatives of Navistar, Inc. from 2010 to 2011. Prior to joining Navistar, Inc., Mr. Clarke held various positions at General Motors Company ("GM"), including President of GM North America from 2006 to 2009 and President of GM Asia Pacific from 2003 to 2006. On June 1, 2009, GM filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code. Mr. Clarke has served on the board of directors of Fuel Systems Solutions, Inc. since December 2011.
Walter G. Borst was appointed Executive Vice President and Chief Financial Officer of NIC on June 18, 2013. Prior to joining NIC, Mr. Borst served as Chairman, President and CEO of GM Asset Management and Vice President of GM since 2010. Prior to that, Mr. Borst served as Vice President and Treasurer of GM from 2009 to 2010 and as Treasurer of GM from 2003 to 2009. On June 1, 2009, GM filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Jack Allen has served as Executive Vice President and Chief Operating Officer since April 2013. Prior to holding this role, Mr. Allen held various positions with the Company, most recently as President of North American Trucks and Parts since June 2012, President of North American Trucks from 2008 to 2012, President of the Engine Group from 2004 to 2008, Vice President and General Manager of the Parts Group from 2002 to 2004 and Vice President and General Manager of the Blue Diamond Truck Company, a joint venture with Ford, from 2001 to 2002. Mr. Allen has served on the board of directors of The Valspar Corporation since December 2011.
Eric Tech has served as Senior Vice President, Strategy and Planning, and President, Global and Specialty Business, since June 2013. Prior to holding this role, he served as President, Global Truck and Engine of Navistar, Inc. from June 2012 to June 2013, President, Engine Group of Navistar, Inc. from July 2009 to June 2012, Vice President and General Manager, Engine from November 2008 to July 2009, Vice President and General Manager, Light, Medium and Heavy Truck from July 2008 to November 2008, Vice President and General Manager, Vee and Inline Business Unit from September 2007 to July 2008 and Vice President and General Manager, Vee Business Unit from May 2006 to September 2007. Prior to joining Navistar, Inc., Mr. Tech held various positions of increasing responsibility at the Ford Motor Company in engineering, quality, product planning, and vehicle and program management, most recently as Chief Engineer for Super Duty Truck Programs.
Steven K. Covey has served as Senior Vice President and General Counsel of NIC since 2004 and Chief Ethics Officer since 2008. Mr. Covey has also served as Senior Vice President and General Counsel of Navistar, Inc. since 2004 and Chief Ethics Officer since 2008. Prior to holding these positions, Mr. Covey served as Deputy General Counsel of Navistar, Inc. from April 2004 to September 2004 and as Vice President and General Counsel of Navistar Financial Corporation from 2000 to 2004. Mr. Covey also served as Corporate Secretary for NIC from 1990 to 2000 and Associate General Counsel of Navistar, Inc. from 1992 to 2000.

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James M. Moran has served as Senior Vice President and Treasurer of NIC since June 2013. Prior to this role, he served as Vice President and Treasurer of NIC from 2008 to June 2013. Mr. Moran has also served as Senior Vice President and Treasurer of Navistar, Inc. since June 2013 and Vice President and Treasurer of Navistar, Inc. from 2008 to June 2013. Mr. Moran has also served as Senior Vice President and Treasurer of NFC since April 2013 and Vice President and Treasurer of NFC from January 2013 to April 2013. Prior to these positions, Mr. Moran served as Vice President and Assistant Treasurer of both NIC and Navistar, Inc. from 2007 to 2008 and Director of Corporate Finance of Navistar, Inc. from 2005 to 2007. Prior to joining NIC, Mr. Moran served as Vice President and Treasurer of R.R. Donnelley & Sons Company, an international provider of print and print related services, from 2003 to 2004, and Assistant Treasurer of R.R. Donnelley & Sons Company from 2002 to 2003. Prior to that, Mr. Moran held various positions in corporate finance, strategic planning, and credit and collections at R.R. Donnelley & Sons Company.
Richard C. Tarapchak has served as Senior Vice President and Corporate Controller (Principal Accounting Officer) of NIC since June 2013 and Vice President and Corporate Controller (Principal Accounting Officer) of NIC from March 2010 to June 2013. Prior to holding this position, Mr. Tarapchak served as Vice President-Strategic Initiatives of Navistar, Inc. from 2008 to March 2010. Mr. Tarapchak also served as Vice President and Chief Financial Officer of the Truck Group of Navistar, Inc. from 2005 to 2008, Director-Corporate Financial Analysis of Navistar, Inc. from 2003 to 2005 and Director, Finance and Operations of Navistar, Inc. from 2000 to 2003.
Curt A. Kramer has served as Corporate Secretary of NIC since 2007. Mr. Kramer has also served as Associate General Counsel and Corporate Secretary of Navistar, Inc. since 2007. Prior to holding these positions, Mr. Kramer served as General Attorney of Navistar, Inc. from April 2007 to October 2007, Senior Counsel of Navistar, Inc. from 2004 to 2007, Senior Attorney of Navistar, Inc. from 2003 to 2004, and Attorney of Navistar, Inc. from 2002 to 2003. Prior to joining Navistar, Inc., Mr. Kramer was in private practice.
Gregory W. Elliott has served as Senior Vice President, Human Resources and Administration of Navistar, Inc. since 2008. Prior to holding this position, Mr. Elliott served as Vice President, Corporate Human Resources and Administration of Navistar, Inc. from 2004 to 2008 and as Vice President, Corporate Communications of Navistar, Inc. from 2000 to 2004. Prior to joining Navistar, Inc., Mr. Elliott served as Director of Executive Communications of General Motors Corporation from 1997 to 1999.


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Item 1A.
Risk Factors
Our financial condition, results of operations, and cash flows are subject to various risks, many of which are not exclusively within our control, which may cause actual performance to differ materially from historical or projected future performance. We have in place an Enterprise Risk Management ("ERM") process that involves systematic risk identification and mitigation covering the categories of Strategic, Financial, Operational, and Compliance risk. The goal of ERM is not to eliminate all risk, but rather to identify, assess and rank risks; assign, mitigate and monitor risks; and report the status of our risks to the Management Risk Committee and the Board of Directors and its committees. The risks described below could materially and adversely affect our business, financial condition, results of operations, or cash flows. These risks are not the only risks that we face and our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.
We may not realize sufficient acceptance of our product in the marketplace in order to achieve our goal of regaining market share.
A key element of our operating strategy is to renew our focus on our primary markets and regain market share following the transition from our EGR only engine technology to a SCR engine technology. Our success in regaining market share depends in part on our ability to achieve market acceptance of our existing and new products. The extent to which, and the rate at which, we achieve market acceptance and penetration of our current and future products is a function of many variables including, but not limited to: price, safety, efficacy, reliability, conversion costs, competitive pressures, regulatory approvals, marketing and sales efforts, and general economic conditions affecting purchasing patterns. Any failure to regain market share could have an adverse effect on our business, liquidity, results of operations and financial condition.
Our business has significant liquidity requirements, and our recent operating results have had an adverse impact on our liquidity position.
Our business has significant liquidity requirements, and our recent operating results have had an adverse impact on our liquidity position. In that regard, borrowings of an aggregate of $570 million represented by our 3.00% senior subordinated convertible notes due October 2014 (the "2014 Convertible Notes") are scheduled to mature on October 15, 2014 and, as a result, are reflected as a current liability in our consolidated balance sheet as of October 31, 2013. We believe that our cash on-hand, together with funds generated by our operations and potential borrowings under our credit facilities, will provide us with sufficient liquidity and capital resources to meet our working capital, debt service, capital expenditures and other operating needs for the foreseeable future. Significant assumptions underlie our beliefs with respect to our liquidity position, including, among other things, assumptions relating to North American truck volumes for 2014, the successful implementation of our revised engine strategy, the continuing availability of trade credit from certain key suppliers, the ability to regain market share and the absence of material adverse developments in our competitive market position, business, access to the capital markets or capital requirements. As a result, we cannot assure you that we will continue to have sufficient liquidity to meet our operating needs. In the event that we do not have sufficient liquidity, we may be required to seek additional capital, sell assets, reduce or cut back our operating activities or otherwise alter our business strategy.
Our substantial indebtedness could adversely affect our financial condition, cash flow, and operating flexibility.
Our significant amount of outstanding indebtedness and the covenants contained in our debt agreements could have important consequences for our operations. The size and terms of our senior secured, term loan credit facility (the "Amended Term Loan Credit Facility") limits our ability to obtain additional debt financing to fund future working capital, acquisitions, capital expenditures, engineering and product development costs, and other general corporate requirements. Other consequences for our operations could include:
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to use operating cash flow in other areas of our business because we must dedicate a portion of these funds to make significantly higher interest payments on our indebtedness;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
limiting our ability to take advantage of business opportunities as a result of various restrictive covenants in our debt agreements; and
placing us at a competitive disadvantage compared to our competitors that have less debt.
Our ability to make required payments of principal and interest on our debt will depend on our future performance and the other cash requirements of our business. Our performance, to a certain extent, is subject to general economic, political, financial, competitive, and other factors that are beyond our control. We cannot provide any assurance that our business will

15


generate sufficient cash flow from operations or that future borrowings will be available under certain of our debt agreements in an amount sufficient to enable us to service our indebtedness.
Our debt agreements contain certain restrictive covenants and customary events of default. These restrictive covenants limit our ability to take certain actions, such as, among other things: make restricted payments; incur additional debt and issue preferred or disqualified stock; create liens; create or permit to exist restrictions on our ability or the ability of our restricted subsidiaries to make certain payments or distributions; engage in sale-leaseback transactions; engage in mergers or consolidations or transfer all or substantially all of our assets; designate restricted and unrestricted subsidiaries; make certain dispositions and transfers of assets; place limitations on the ability of our restricted subsidiaries to make distributions; enter into transactions with affiliates; and guarantee indebtedness. One or more of these restrictive covenants may limit our ability to execute our preferred business strategy, take advantage of business opportunities, or react to changing industry conditions.
Upon an event of default, if not waived by our lenders, our lenders may declare all amounts outstanding as due and payable, which may cause cross-defaults under our other debt obligations. If our current lenders accelerate the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to our lenders on a timely basis, and there is no guarantee that we would be able to repay, refinance, or restructure the payments on such debt. Further, under our Amended Term Loan Credit Facility and our Amended and Restated Asset-Based Credit Facility, the lenders would have the right to foreclose on certain of our assets, which could have a material adverse effect on our Company.
Upon the occurrence of a "change of control" as specified in each of the principal debt agreements of our Manufacturing operations, we are required to offer to repurchase or repay such indebtedness. Under these agreements, a "change of control" is generally defined to include, among other things: (a) the acquisition by a person or group of at least 35 percent of our common stock (50 percent for our 2014 Convertible Notes and 4.50% senior subordinated convertible notes due October 2018 (the "2018 Convertible Notes")), (b) a merger or consolidation in which holders of our common stock own less than a majority of the equity in the resulting entity, or (c) replacement of a majority of the members of our board of directors by persons who were not nominated by our current directors. Under our Amended and Restated Asset-Based Credit Facility and our Amended Term Loan Credit Facility, a change in control would result in an immediate event of default, which would allow our lenders to accelerate the debt owed to them. Under the indentures or loan agreements for our debt securities, we may be required to offer to purchase the outstanding notes under such indentures at a premium upon a change in control. In any such event, we may not have sufficient funds available to repay amounts outstanding under these agreements, which may also cause cross-defaults under our other debt obligations. Further, under our Amended and Restated Asset-Based Credit Facility and our Amended Term Loan Credit Facility, the lenders could have the right to foreclose on certain of our assets, which could have a material adverse effect on our financial position and results of operations.
Increased warranty costs may negatively impact our near term operating results.
Emissions regulations in the U.S. and Canada have resulted in rapid product development cycles, driving significant changes from previous engine models. In 2010, we introduced changes to our engine line-up in response to 2010 emissions standards ("2010 Emission Engines"). Component complexity and other related factors associated with meeting emissions standards have contributed to higher repair costs that exceeded those that we have historically experienced.
We accrue warranty related costs under standard warranty terms and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers. We also offer optional extended warranty contracts. Our warranty estimates are established using historical information about the nature, frequency, timing, and average cost of warranty claims. We recognize losses on extended warranty contracts when the expected costs under the contracts exceed related unearned revenue. We also utilize actuarial analysis in order to determine whether our accrual estimate falls within a reasonable range.  However, warranty claims inherently have a high amount of variability in timing and severity and can be influenced by many external factors.   
Historically, warranty claims experience for launch-year engines has been higher compared to the prior model-year engines; however, over time we have been able to refine both the design and manufacturing process to reduce both the volume and the severity of warranty claims. While we continue to improve the design and manufacturing of our engines to reduce the volume and severity of warranty claims and refine our process for determining our warranty cost accruals, we have continued to experience higher warranty spend than expected, which contributed to significantly higher warranty charges for current and pre-existing warranties, including charges for extended service contracts, in 2012 and 2013. We recognized adjustments to pre-existing warranties of $404 million for both of the years ended October 31, 2013 and 2012 compared to adjustments of $79 million in the year ended October 31, 2011. The increase in the adjustments to pre-existing warranties in 2013 and 2012 related to the unanticipated increase in warranty spend, primarily for certain 2010 Emission Engines.
We may continue to experience an increase in warranty spend compared to prior periods that could result in additional charges for adjustments to pre-existing warranties. In addition, as we identify opportunities to improve the design and manufacturing of our engines, we may incur additional charges for recalls and field campaigns to address identified issues. These charges could

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have an adverse effect on our financial condition, results of operations and cash flows. In fiscal 2013, to meet new emissions requirements, including but not limited to OBD, we launched several products that incorporate additional changes and added component complexity. These changes may result in additional future warranty expense that may have an adverse effect on our financial condition, results of operations and cash flows.
We have identified material weaknesses in our internal controls over financial reporting that, if not properly corrected, could materially adversely affect our operations and result in material misstatements in our financial statements.

As described in "Item 9A. Controls and Procedures", we have concluded that our internal control over financial reporting was ineffective as of October 31, 2013 because a material weakness existed in our internal control over financial reporting related to the validation of the completeness and accuracy of underlying data used in the determination of significant estimates and accounting transactions and the presentation of income tax expense. If we are unable to remediate our material weaknesses in a timely manner, we may be unable to provide holders of our securities with the required financial information in a timely and reliable manner and we may incorrectly report financial information. Either of these events could have a material adverse effect on our operations, investor, supplier and customer confidence in our reported financial information and/or the trading price of our common stock.
Past and potential further downgrades in our debt ratings may adversely affect our liquidity, competitive position and access to capital markets.
The major debt-rating agencies routinely evaluate and rate our debt according to a number of factors, among which are our perceived financial strength and transparency with rating agencies and timeliness of financial reporting. In 2012 and 2013 the major debt-rating agencies downgraded our ratings, including a downgrade by Standard & Poor’s Ratings Services on October 7, 2013. Further, Standard & Poor’s Ratings Services currently has our rating outlook as developing. Any further downgrade in our credit ratings and any resulting negative publicity could adversely affect our continued access to trade credit on customary terms as well as our ability to access capital in the future under acceptable terms and conditions.
Our ability to execute our strategy is dependent upon our ability to attract, train and retain qualified personnel.
Our continued success depends, in part, on our ability to identify, attract, motivate, train and retain qualified personnel in key functions and geographic areas. In particular, we are dependent on our ability to identify, attract, motivate, train and retain qualified engineers with the requisite education, background and industry experience who can assist in the development, enhancement and introduction of new products and technology solutions. Further, we have significant operations in foreign countries, including Canada, Mexico and Brazil, and, to effectively manage our global operations, we will need to continue to be able to recruit, train, assimilate, motivate and retain qualified experienced employees around the world.
Failure to attract, train and retain qualified personnel could impair our ability to execute our business strategy and could have an adverse effect on our business prospects. In addition, our operations and our ability to execute our business strategy may be negatively impacted by the loss of certain personnel in connection with our reductions-in-force and other personnel departures that occurred throughout 2012 and 2013, if we have retained employees with insufficient experience, skills and knowledge base.
We could incur restructuring and impairment charges as we continue to evaluate our portfolio of assets and identify opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure.
We continue to evaluate our portfolio of assets in order to validate their strategic and financial fit. To allow us to increase our focus on our North American core business, we are evaluating product lines, businesses, and engineering programs that fall outside of our core business. We are using an ROIC methodology, combined with an assessment of the strategic fit to our core business, to identify areas that are under-performing and/or non-strategic. For under-performing and non-strategic areas, we are evaluating whether to fix, divest, or close those areas. In addition, we are evaluating opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure. These actions could result in restructuring and related charges, including but not limited to asset impairments, employee termination costs, charges for pension and other postretirement contractual benefits, potential additional pension funding obligations, and pension curtailments, any of which could be significant, and could adversely affect our financial condition and results of operations.
We have substantial amounts of long-lived assets, including goodwill and intangible assets, which are subject to periodic impairment analysis and review. Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition, and general economic conditions, requires significant judgment.
It is reasonably possible that within the next twelve months we could recognize goodwill impairment charges for certain reporting units if we have declines in profitability due to changes in volume, market pricing, cost, or the business environment.

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Any of the above future actions could result in charges that could have an adverse effect on our financial condition and results of operations.
We may not achieve all of the expected benefits from our cost saving initiatives.
We have implemented a number of cost saving initiatives, including the consolidation of our North American truck and engine engineering operations, the relocation of our world headquarters to Lisle, Illinois, continued reductions in discretionary spending and employee headcount reductions. As a result, our operating costs, which include SG&A expenses and engineering and product development costs, decreased by $330 million in 2013, compared to the prior year. We expect that actions taken in the fourth quarter of 2013 will contribute an estimated additional $50 million to $60 million of annual savings beginning in 2014. In addition, we continue to evaluate additional options to improve the efficiency and performance of our operations. This includes evaluating our portfolio of assets, which could include closing or divesting non-core/non-strategic businesses, and identifying opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure. We have made certain assumptions in estimating the anticipated impact of our cost saving initiatives, which include the estimated savings from the elimination of certain open positions. These assumptions may turn out to be incorrect due to a variety of factors. In addition, our ability to realize the expected benefits from these initiatives is subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. Some of our cost saving measures may not have the impact on our profitability that we currently project or we may not be able to sustain the savings. If we are unsuccessful in implementing these initiatives or if we do not achieve our expected results, our results of operations and cash flows could be adversely affected.
We may discover defects in vehicles potentially resulting in delays in new model launches, recall campaigns, or increased warranty costs.
Meeting or exceeding many government-mandated safety standards is costly and often technologically challenging, especially where two or more government-mandated standards may conflict. Government safety standards require manufacturers to remedy defects related to motor vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that they do not comply with a safety standard. Should we or government safety regulators determine that a safety or other defect or noncompliance exists with respect to certain of our vehicles, there could be a delay in the launch of a new model, a significant increase in warranty claims or a recall, the costs of which could be substantial.
Additionally, if we experience failure in some of our emissions components and the emission component defect rates of our engines exceed a certain level set by the California Air Resources Board ("CARB") and the U.S. Environmental Protection Agency (the "EPA"), those engines may be subject to corrective actions by these agencies, which may include extending the warranties of those engines. This could increase exposure beyond the stated warranty period to the relevant regulatory useful life of the engine, and these actions could have an adverse effect on our financial condition, results of operations and cash flows.
Our Manufacturing operations are dependent upon third-party suppliers, including, in certain cases, single-source suppliers, making us vulnerable to supply shortages.
We obtain raw materials, parts and manufactured components from third-party suppliers. Any delay in receiving supplies could impair our ability to deliver products to our customers and, accordingly, could have an adverse effect on our business, financial condition, results of operations, and cash flows. The volatility in the financial markets and uncertainty in the automotive sector could result in exposure related to the financial viability of certain of our key third-party suppliers. Suppliers may also exit certain business lines, causing us to find other suppliers for materials or components and potentially delaying our ability to deliver products to customers, or our suppliers may change the terms on which they are willing to provide products to us, any of which could adversely affect our financial condition and results of operations. In addition, many of our suppliers have unionized workforces that could be subject to work stoppages as a result of labor relations issues. Some of our suppliers are the sole source for a particular supply item (e.g., certain engines and the majority of parts and manufactured components) and cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and contractual commitments that might be required by another supplier in order to provide the component or materials. In addition to the risks described above regarding interruption of supplies, which are exacerbated in the case of single-source suppliers, the exclusive supplier of a key component potentially could exert significant bargaining power over price, quality, warranty claims or other terms relating to a component.
We have significant under-funded postretirement obligations.
On a U.S. generally accepted accounting principles ("GAAP") basis, the under-funded portion of our projected benefit obligation was $1.4 billion and $2.1 billion for pension benefits at October 31, 2013 and 2012, respectively, and $1.2 billion and $1.4 billion for postretirement healthcare benefits at October 31, 2013 and 2012, respectively. In calculating these amounts, we have assumed expected rates of return on plan assets and growth rates of retiree medical costs. The failure to achieve the

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expected rates of return and growth rates, as well as reductions in interest rates, could have an adverse impact on our under-funded postretirement obligations, financial condition, results of operations and cash flows. In addition, the continued restructuring and rationalization of our business could increase our pension funding obligations under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The volatility in the financial markets affects the valuation of our pension assets and liabilities, resulting in potentially higher pension costs and higher levels of under-funding in future periods. The requirements set forth in ERISA and the Internal Revenue Code of 1986, as amended (the "IRC"), as applicable to our U.S. pension plans (including such timing requirements) mandated by the Pension Protection Act of 2006 (the "PPA") to fully fund our U.S. pension plans, net of any current or possible future legislative or governmental agency relief, could also have an adverse impact on our business, financial condition, results of operations and cash flows even though the recently-enacted pension funding relief legislation Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 and the Moving Ahead for Progress in the 21st Century Act ("MAP-21 Act") have reduced our funding requirements over the next five years.
Implementation of our emissions strategy, federal regulations and fuel economy rules may increase costs.
Recent and future changes to on-highway emissions or performance standards (including fuel efficiency, noise, and safety), as well as compliance with additional environmental requirements, are expected to add to the cost of our products and increase the engineering and product development programs of our business. Implementation of our emissions strategy is ongoing and we may experience increased costs or compliance or timing risks as we continue to convert our proprietary engines to SCR, implement next-phase OBD requirements and manage emission credit balances. The EPA, the U.S. Department of Transportation and the government of Canada have issued final rules on greenhouse gas emissions and fuel economy for medium and heavy duty vehicles and engines. The emission standards establish required minimum fuel economy and greenhouse gas emissions levels for both engines and vehicles primarily through the increased use of existing technology. The rules, which apply to our engines and vehicles, initially require EPA certification for vehicles and engines to greenhouse gas emissions standards in 2014 and are fully implemented in model year 2017. These standards will increase costs of development for engines and vehicles and administrative costs arising from implementation of the standards. In addition, other regulatory proposals under consideration or those that are proposed in the future, including those in the state of California, may adversely affect results of operations due to increased research, development, and warranty costs.
 A small number of our stockholders have significant influence over our business.
In October 2012, we entered into settlement agreements with two of our significant stockholders, Carl C. Icahn and several entities controlled by him (collectively, the "Icahn Group") and Mark H. Rachesky, MD, and several entities controlled by him (collectively, the "MHR Group") pursuant to which the Icahn Group and the MHR Group each had one representative appointed to our Board, and together the Icahn Group and the MHR Group mutually agreed upon a third representative appointed to our board of directors. In July 2013, we entered into amended settlement agreements with the Icahn Group and the MHR Group pursuant to which the Icahn Group and the MHR group each will have two representatives nominated for election at our 2014 annual meeting. In connection with these agreements, one director resigned, and our board of directors will remain at nine members until the 2014 annual meeting, when it will be increased to ten members.
As of October 31, 2013, based on filings made with the SEC and other information made available to us as of that date, we believe that: (i) the Icahn Group held approximately 13.3 million shares, or 16.5% of our outstanding common stock, (ii) the MHR Group held approximately 13.1 million shares, or 16.2% of our outstanding common stock, and (iii) the Icahn Group, the MHR Group, and two other stockholders, collectively held over 60% of our outstanding common stock.
As a result of the foregoing, these stockholders are able to exercise significant influence over the election of our board of directors as well as matters requiring stockholder approval. Further, this concentration of ownership may adversely affect the market price of our common stock.
We are involved in pending litigation and an SEC investigation, and an adverse resolution of such litigation or investigation may adversely affect our business, financial condition, results of operations and cash flows.
Litigation and government investigations can be expensive, lengthy, and disruptive to normal business operations. The results of complex legal or investigative proceedings are often uncertain and difficult to predict. An unfavorable outcome of a particular matter described in our periodic filings or any future legal or investigative proceedings could have an adverse effect on our business, financial condition, results of operations or cash flows.
We are currently involved in a number of pending litigation matters and in an SEC investigation. For additional information regarding certain lawsuits in which we are involved and regarding the SEC investigation, see Item 3, Legal Proceedings, and Note 15, Commitments and Contingencies, to our consolidated financial statements.

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Provisions in our charter and by-laws, our stockholder rights plan and Delaware law could delay and discourage takeover attempts that stockholders may consider favorable.
Certain provisions of our certificate of incorporation and by-laws, and applicable provisions of Delaware corporate law, may make it more difficult for a third party to acquire control of us or change our board of directors and management, or may prevent such acquisition or change. These provisions include:
the ability of our board of directors to issue so-called "flexible" preferred stock;
a provision for any board vacancies to be filled only by the remaining directors;
the inability of stockholders to act by written consent or call special meetings;
advance notice procedures for stockholder proposals to be brought before an annual meeting of our stockholders;
the affirmative vote of holders of the greater of (a) a majority of the voting power of all common stock and (b) at least 85% of the shares of common stock present at a meeting is required to approve certain change of control transactions; and
Section 203 of the Delaware General Corporation Law, which generally restricts us from engaging in certain business combinations with a person who acquires 15% or more of our common stock for a period of three years from the date such person acquired such common stock, unless stockholder or board approval is obtained prior to the acquisition.
In addition, the fact that our ability to utilize our tax net operating losses and research and development tax credits could be adversely affected by a change of control could have an anti-takeover effect.
We have a stockholders rights plan, which may be triggered if any person or group becomes the beneficial owner of or announces an offer to acquire 20% or more of our common shares.
The foregoing provisions may adversely affect the marketability of our common stock by discouraging potential investors from acquiring our stock. In addition, these provisions could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, or impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders.
We must comply with numerous miscellaneous federal national security laws, procurement regulations, and procedures, as well as the rules and regulations of foreign jurisdictions, and our failure to comply could adversely affect our business.
We must observe laws and regulations relating to the formation, administration and performance of federal government contracts that affect how we do business with our clients and impose added costs on our business. For example, the Federal Acquisition Regulations, Defense Federal Acquisition Regulation Supplement, foreign government procurement regulations and the industrial security regulations of the Department of Defense and related laws include provisions that:
allow our government clients to terminate or not renew our contracts if we come under foreign ownership, control or influence;
allow our government clients to terminate existing contracts for the convenience of the government;
require us to prevent unauthorized access to classified information; and
require us to comply with laws and regulations intended to promote various social or economic goals.
We are subject to industrial security regulations of the U.S. Departments of State, Commerce and Defense and other federal agencies that are designed to safeguard against foreigners’ access to classified or restricted information. Similarly, our international operations are subject to the rules and regulations of foreign jurisdictions. If we were to come under foreign ownership, control or influence, we could lose our facility security clearances, which could result in our federal government customers terminating or deciding not to renew our contracts and could impair our ability to obtain new contracts.
A failure to comply with applicable laws, regulations, policies or procedures, including federal regulations regarding the procurement of goods and services and protection of classified information, could result in contract termination, loss of security clearances, suspension or debarment from contracting with the federal government, civil fines and damages and criminal prosecution and penalties, any of which could adversely affect our business.
Our products are subject to export limitations and we may be prevented from shipping our products to certain nations or buyers.
We are subject to federal licensing requirements with respect to the sale and support in foreign countries of certain of our products and the importation of components for our products. In addition, we are obligated to comply with a variety of federal, state and local regulations and procurement policies, both domestically and abroad, governing certain aspects of our

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international sales and support, including regulations promulgated by, among others, the U.S. Departments of Commerce, Defense, State and Justice.
Such licenses may be denied for reasons of U.S. national security or foreign policy. In the case of certain large orders for exports of defense equipment, the Department of State must notify Congress at least 15 to 30 days, depending on the size and location of the sale, prior to authorizing certain sales of defense equipment and services to foreign governments. During that time, Congress may take action to block the proposed sale. We can give no assurances that we will continue to be successful in obtaining the necessary licenses or authorizations or that Congress will not prevent or delay certain sales. Any significant impairment of our ability to sell products outside of the U.S. could negatively impact our financial condition, results of operations and cash flows.
For products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, we are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to, International Traffic in Arms Regulations, Export Administration Regulations, the Foreign Military Sales program and trade sanctions against embargoed countries, and destinations administered by the Office of Foreign Assets Control, U.S. Department of the Treasury. A determination by the U.S. government that we have failed to comply with one or more of these export controls or trade sanctions could result in civil or criminal penalties, including the imposition of significant fines, denial of export privileges, loss of revenues from certain customers, and debarment from participation in U.S. government contracts.
We are subject to the Foreign Corrupt Practices Act (the "FCPA") and other laws which prohibit improper payments to foreign governments and their officials by U.S. and other business entities. We operate in countries known to experience corruption. Our operations in such countries create the risk of an unauthorized payment by one of our employees or agents that could be in violation of various laws including the FCPA.
Additionally, the failure to obtain applicable governmental licenses, clearances, or approvals could adversely affect our ability to continue to service the government contracts we maintain. Exports of some of our products to certain international destinations may require shipment authorization from U.S. export control authorities, including the U.S. Departments of Commerce and State, and authorizations may be conditioned on end-use restrictions.
Our international business is also highly sensitive to changes in foreign national priorities and government budgets. Sales of military products are affected by defense budgets (both in the U.S. and abroad) and U.S. foreign policy.
Our operations are subject to environmental, health and safety laws and regulations that could result in liabilities to us.
Our operations are subject to environmental, health and safety laws and regulations, including those governing discharges to air and water; the management and disposal of hazardous substances; the cleanup of contaminated sites; and health and safety matters. We could incur material costs, including cleanup costs, civil and criminal fines, penalties and third-party claims for property damage or personal injury as a result of violations of or liabilities under such laws and regulations. Contamination has been identified at and in the vicinity of some of our current and former properties for which we have established financial reserves. The ultimate cost of remediating contaminated sites is difficult to accurately predict and could exceed our current estimates. For example, along with the current operator, we are addressing contamination associated with our formerly owned solar turbine site in San Diego, California. While we believe that we have adequate accruals to cover the costs of the ongoing cleanup, we and other parties may be required to conduct additional investigations and remediation in the area, including with respect to any impacts identified in nearby bay sediments. As a result, we also could incur material costs in excess of current reserves at this or other sites as a result of additional cleanup obligations imposed or contamination identified in the future. In addition, as environmental, health, and safety laws and regulations have tended to become stricter, we could incur additional costs complying with requirements that are promulgated in the future.
Our business could be adversely affected by interruptions to our computer and IT systems.
Most of our business activities rely on the efficient and uninterrupted operation of our computer and information technology ("IT") systems and those of third parties with which we have contracted. Our computer and IT systems are vulnerable to damage or interruption from a variety of sources, as well as potential cybersecurity incidents. Any failure of these systems or cybersecurity incidents could have an adverse effect on our business, financial condition and results of operations.
The markets in which we compete are subject to considerable cyclicality.
Our ability to be profitable depends in part on the varying conditions in the truck, bus, mid-range diesel engine, and service parts markets, which are subject to cycles in the overall business environment and are particularly sensitive to the industrial sector, which generates a significant portion of the freight tonnage hauled. Truck and engine demand is also dependent on general economic conditions, interest rate levels and fuel costs, among other external factors.

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 We operate in the highly competitive North American truck market.
The North American truck market in which we operate is highly competitive. The intensity of this competition, which is expected to continue, results in price discounting and margin pressures throughout the industry and adversely affects our ability to increase or maintain vehicle prices. Many of our competitors have greater financial resources, which may place us at a competitive disadvantage in responding to substantial industry changes, such as changes in governmental regulations that require major additional capital expenditures. In addition, certain of our competitors may have lower overall labor costs.
We may not achieve all of the expected benefits from our acquisitions, joint ventures or strategic alliances.
Over the last several years, we have completed a number of acquisitions, joint ventures and strategic alliances as part of our business strategy. We cannot provide any assurances that these acquisitions, joint ventures or strategic alliances will generate all of the expected benefits. In addition, we cannot assure you that disputes will not arise with our joint venture partners and that such disputes will not lead to litigation or otherwise have an adverse effect on the joint ventures or our relationships with our joint venture partners. Failure to successfully manage and integrate these acquisitions, joint ventures and strategic alliances could adversely impact our financial condition, results of operations and cash flows. In light of our recent operating results, we are currently evaluating opportunities to further restructure our business in an effort to optimize our cost structure, which could include, among other actions, rationalization of certain of our acquisitions, joint ventures or strategic alliances.
We are exposed to political, economic, and other risks that arise from operating a multinational business.
We have significant operations in foreign countries, primarily in Canada, Mexico and Brazil. Accordingly, our business is subject to the political, economic, and other risks that are inherent in operating a multinational company. These risks include, among others:
trade protection measures and import or export licensing requirements;
tax rates in certain foreign countries that exceed those in the U.S., and the imposition of foreign withholding taxes on the remittance of foreign earnings to the U.S.;
difficulty in staffing and managing international operations and the application of foreign labor regulations;
multiple and potentially conflicting laws, regulations, and policies that are subject to change;
currency exchange rate risk; and
changes in general economic and political conditions in countries where we operate, particularly in emerging markets.
Our business may be adversely impacted by work stoppages and other labor relations matters.
We are subject to risk of work stoppages and other labor relations matters because a significant portion of our workforce is unionized. As of October 31, 2013, approximately 5,600 of our hourly workers and approximately 400 of our salaried workers were represented by labor unions and are covered by collective bargaining agreements. Many of these agreements include provisions that limit our ability to realize cost savings from restructuring initiatives such as plant closings and reductions in workforce. Our current collective bargaining agreement with the UAW will expire in October 2014. Any strikes, threats of strikes, arbitration or other resistance in connection with the negotiation of new labor agreements or otherwise could adversely affect our business as well as impair our ability to implement further measures to reduce structural costs and improve production efficiencies. A lengthy strike that involves a significant portion of our manufacturing facilities could have an adverse effect on our financial condition, results of operations, and cash flows.
Item 1B.
Unresolved Staff Comments
None.

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Item 2.
Properties
Our North America Truck segment operates thirteen manufacturing and assembly facilities, which contain in the aggregate approximately eleven million square-feet of floor space. Of these thirteen facilities, eight are owned and five are subject to leases. Six plants manufacture and assemble trucks, buses, and chassis, six plants are used to build engines, and one plant is involved with rail car manufacturing. A portion of the rail car manufacturing plant is subleased to a third-party, pursuant to a sublease agreement entered into in February 2013. Of the six plants that build engines, three manufacture diesel engines, one manufactures fuel injectors, one manufactures grey iron castings, and one manufactures ductile iron castings.
Our North America Parts segment has seven distribution centers in the U.S., two in Canada, and one in Mexico.
Our Global Operations segment owns and operates manufacturing plants in both Brazil and Argentina, which contain a total of 1.3 million square-feet of floor space for use by our South American engine subsidiaries.
Our Financial Services segment, the majority of whose activities are conducted at our headquarters in Lisle, Illinois, also leases an office in Mexico.
Our principal product development and engineering facilities are currently located in Lisle, Illinois; Melrose Park, Illinois; Madison Heights, Michigan; and Columbia, South Carolina. Additionally, we own or lease other significant properties in the U.S. and Canada including vehicle and parts distribution centers, sales offices, and our headquarters in Lisle, Illinois.
Not included above are the Garland, Texas truck manufacturing plant and Indianapolis, Indiana engine plant, both of which have ceased production activities.
We believe that all of our facilities have been adequately maintained, are in good operating condition, and are suitable for our current needs. These facilities, together with planned capital expenditures, are expected to meet our needs in the foreseeable future.

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Item 3.     Legal Proceedings
Overview
We are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings that constitute ordinary, routine litigation incidental to our business. The majority of these claims and proceedings relate to commercial, product liability, and warranty matters. In our opinion, apart from the actions set forth below, the disposition of these proceedings and claims, after taking into account recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on our business or our financial condition, results of operations, and cash flows.
Profit Sharing Disputes
Pursuant to the 1993 Settlement Agreement, the program administrator and named fiduciary of the Supplemental Benefit Program is the Supplemental Benefit Program committee (the "Committee"), comprised of non-Company individuals. In August 2013, the Committee filed a motion for leave to amend its February 2013 complaint (which sought injunctive relief for the Company to provide certain information to which it was allegedly entitled under the Supplemental Benefit Profit Sharing Plan) and a proposed amended complaint (the "Profit Sharing Complaint") in the U.S. District Court for the Southern District of Ohio (the "Court"). Leave to file the Profit Sharing Complaint was granted by the Court in October 2013. In its Profit Sharing Complaint, the Committee alleges the Company breached the 1993 Settlement Agreement and violated ERISA by failing to properly calculate profit sharing contributions due under the Supplemental Benefit Profit Sharing Plan. The Committee seeks damages in excess of $50 million, injunctive relief and reimbursement of attorneys' fees and costs. In October 2013, the Company filed a motion to dismiss the Profit Sharing Complaint and to compel the Committee to comply with the dispute resolution procedures set forth in the Supplemental Benefit Trust Profit Sharing Plan. The Company’s motion is currently pending before the Court. In addition, various local bargaining units of the UAW have filed separate grievances pursuant to the profit sharing plans under various collective bargaining agreements in effect between the Company and the UAW that may have similar legal and factual issues as the Profit Sharing Complaint.
FATMA Notice
International Indústria de Motores da América do Sul Ltda. ("IIAA"), formerly known as Maxion International Motores S/A ("Maxion"), now a wholly owned subsidiary of the Company, received a notice in July 2010 from the State of Santa Catarina Environmental Protection Agency ("FATMA") in Brazil. The notice alleged that Maxion had sent wastes to a facility owned and operated by a company known as Natureza and that soil and groundwater contamination had occurred at the Natureza facility. The notice asserted liability against Maxion and assessed an initial penalty in the amount of R$2 million (the equivalent of approximately US$1 million at October 31, 2013), which is not due and final until all administrative appeals are exhausted. Maxion was one of numerous companies that received similar notices. IIAA filed an administrative defense in August 2010 and has not yet received a decision following that filing. IIAA disputes the allegations in the notice and intends to vigorously defend itself.
Lis Franco de Toledo, et. al. vs. Syntex do Brasil and IIAA
In 1973, Syntex do Brasil Industria e Comercio Ltda. ("Syntex"), a predecessor of IIAA, our Brazilian engine manufacturing subsidiary, which was formerly known as MWM International Industria de Motores da America do Sul Ltda ("MWM"), filed a lawsuit in Brazilian court against Dr. Lis Franco de Toledo and others (collectively, "Lis Franco"). Syntex claimed Lis Franco had improperly terminated a contract which provided for the transfer from Lis Franco to Syntex of a patent for the production of a certain vaccine. Lis Franco filed a counterclaim alleging that he was entitled to royalties under the contract. In 1975, the Brazilian court ruled in favor of Lis Franco, a decision which was affirmed on appeal in 1976. In 1984, while the case was still pending, Syntex’ owner, Syntex Comercio e Participacoes Ltds ("Syntex Parent") sold the stock of Syntex to MWM, and in connection with that sale Syntex Parent agreed to indemnify and hold harmless MWM for any and all liabilities of Syntex, including its prior pharmaceutical operations (which had been previously spun-off to another subsidiary wholly-owned by the Syntex Parent) and any payments that might be payable under the Lis Franco lawsuit. In the mid to late 1990s, Syntex Parent was merged with an entity known as Wyeth Industria Farmaceutica LTDA ("Wyeth").
In 1999, Lis Franco amended its pleadings to add MWM to the lawsuit as a defendant. In 2000, Wyeth acknowledged to the Brazilian court its sole responsibility for amounts due in the Lis Franco lawsuit and MWM asked the court to be dismissed from that action. The judge denied that request. MWM appealed and lost.
In his pleadings, Lis Franco alleged that the royalties payable to him were approximately R$42 million. MWM believed the appropriate amount payable was approximately R$16 million. In December 2009, the court appointed expert responsible for the preparation of the royalty calculation filed a report with the court indicating royalty damages of approximately R$70 million. MWM challenged the expert’s calculation. In August 2010, the court asked the parties to consider the appointment of a

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new expert. MWM agreed with this request but Lis Franco objected and, in September 2010, the court accepted and ratified the expert’s calculation as of May 2010 in the amount of R$74 million and entered judgment against MWM.
In September 2010, MWM filed a motion for clarification of the decision which would suspend its enforcement. The Brazilian court denied this motion and MWM appealed the matter to the Rio de Janeiro State Court of Appeals (the "Court of Appeals"). In January 2011, the Court of Appeals granted the appeal and issued an injunction suspending the lower court’s decision and judgment in favor of Lis Franco. In January 2011, MWM merged into IIAA and is now known as IIAA. An expert appointed by the Court of Appeals submitted his calculation report on October 24, 2011, and determined the amount to be R$10.85 million. The parties submitted comments to such report in December 2011, the expert replied to these comments and ratified his previous report in May 2012, and the parties again submitted comments to the expert's reply. The expert reviewed these comments and submitted a complementary report in December 2012 which determined the amount to be R$22 million. The parties submitted comments to the complementary report in January 2013. In May 2013, the Court of Appeals determined the damages amount to be R$25 million (the equivalent of approximately US$12 million at October 31, 2013). Wyeth, Lis Franco and MWM filed motions for clarification against such decision and in July 2013 the Court of Appeals denied all of these motions. MWM, Wyeth and Lis Franco filed a special appeal to the Brasilia Special Court of Appeals on August 20, 2013. The Brasilia Special Court of Appeals has not yet ruled on the special appeal.
In parallel, in May 2010, MWM filed a lawsuit in Sao Paulo, Brazil, against Wyeth seeking recognition that Wyeth is liable for any and all liabilities, costs, expenses, and payments related to the Lis Franco lawsuit. In September 2012, the Sao Paulo court ruled in favor of MWM and ordered Wyeth to pay, directly to the Estate of Lis Franco de Toledo and others and jointly with MWM, the amounts of the condemnation, to be determined at the end of the liquidation proceeding. The Sao Paulo court also ordered Wyeth to reimburse MWM for all expenses, including court costs and attorney fees associated with the case. The parties were notified of the decision in October 2012, to which MWM and Wyeth filed motions for clarification of certain issues, and in December 2012, the Sao Paulo court rejected both motions. In January 2013, Wyeth filed an appeal to the San Paulo court's December 2012 decision, and in April 2013, MWM filed an answer to the appeal. The appeal was rejected by the Court of Appeals on September 10, 2013. Wyeth filed a motion for clarification to the Court of Appeals. The motion was rejected by the Court of Appeals on November 5, 2013.
The parties are currently in settlement discussions in respect to these matters.
Westbrook vs. Navistar. et. al.
In April 2011, a False Claims Act qui tam complaint against Navistar, Inc., Navistar Defense, LLC, a wholly owned subsidiary of the Company ("Navistar Defense"), and unrelated third parties was unsealed by the United States District Court for the Northern District of Texas (the "Court"). The complaint was initially filed under seal in August 2010 by a qui tam relator ("Westbrook") on behalf of the federal government. The complaint alleged violations of the False Claims Act based on allegations that parts of vehicles delivered by Navistar Defense were not painted according to the contract specification, and improper activities in dealing with one of the vendors who painted certain of the vehicle parts. The complaint seeks monetary damages and civil penalties on behalf of the federal government, as well as costs and expenses. After the complaint was unsealed, the U.S. government notified the Court that it declined to intervene at that time. Navistar, Inc. was served with the complaint in July 2011, and a scheduling order and a revised scheduling order was entered by the Court. In December 2011, the Court granted a motion by Navistar, Inc. and Navistar Defense, along with the other named defendants to judicially estop Westbrook and his affiliated company from participating in any recovery from the action, and to substitute his bankruptcy trustee (the "Trustee") as the only person with standing to pursue Westbrook's claims. In March 2012, the Court granted motions by Navistar, Inc., Navistar Defense, and the other named defendants to dismiss the complaint. The dismissal was without prejudice and the Trustee filed an amended complaint in April 2012. In May 2012, Navistar, Inc., Navistar Defense, and the other named defendants filed motions to dismiss the amended complaint. In addition, the parties jointly filed a motion to stay discovery pending resolution of the motions to dismiss. In July 2012, the Court granted all of the defendants' motions to dismiss with prejudice, dismissing all of the claims except the claim against Navistar Defense for retaliation and the claim against Navistar, Inc. for retaliation, which was dismissed without prejudice. Plaintiff was granted leave to file an amended complaint including only the retaliation claims against Navistar Defense and Navistar, Inc. The Trustee did not file a retaliation claim against Navistar, Inc. and voluntarily dismissed without prejudice the retaliation claim against Navistar Defense. The Trustee also filed a motion for reconsideration of the dismissal of the False Claims Act claims against Navistar Defense which the Court denied. The Court issued final judgment dismissing the matter in July 2012. Westbrook filed a notice of appeal to the Fifth Circuit Court of Appeals ("Fifth Circuit") in August 2012 as to the final judgment and the motion for reconsideration as to Navistar Defense only. The Trustee filed a separate notice of appeal to the Fifth Circuit in August 2012 as to several district court orders, including the December 2011 order holding the Trustee, not Westbrook, to be the proper party in the case. In December 2012, Navistar Defense's motion to dismiss Westbrook's appeal was denied "without prejudice to reconsideration by the oral argument panel" by the Fifth Circuit. The Fifth Circuit heard oral arguments on both appeals in November 2013 but has not yet issued a ruling on either appeal.

25


Shareholder Litigation
In March 2013, a putative class action complaint, alleging securities fraud, was filed against us by the Construction Workers Pension Trust Fund - Lake County and Vicinity, on behalf of itself and all other similarly situated purchasers of our common stock between the period of November 3, 2010 and August 1, 2012. A second class action complaint was filed in April 2013 by the Norfolk County Retirement System, individually and on behalf of all other similarly situated purchasers of our common stock between the period of June 9, 2010 and August 1, 2012. A third class action complaint was filed in April 2013 by Jane C. Purnell FBO Purnell Family Trust, on behalf of itself and all other similarly situated purchasers of our common stock between the period of November 3, 2010 and August 1, 2012. Each complaint named us as well as Daniel C. Ustian, our former President and Chief Executive Officer, and Andrew J. Cederoth, our former Executive Vice President and Chief Financial Officer as defendants. These complaints (collectively, the "10b-5 Cases") contain similar factual allegations which include, among other things, that we violated the federal securities laws by knowingly issuing materially false and misleading statements concerning our financial condition and future business prospects and that we misrepresented and omitted material facts in filings with the SEC concerning the timing and likelihood of EPA certification of our EGR technology to meet 2010 EPA emission standards. The plaintiffs in these matters seek compensatory damages and attorneys' fees, among other relief. In May 2013, an order was entered transferring and consolidating all cases before one judge and in July 2013, the Court appointed a lead plaintiff and lead plaintiff's counsel. The lead plaintiff filed a consolidated amended complaint in October 2013.  The consolidated amended complaint enlarged the proposed class period to June 9, 2009 through August 1, 2012, and named fourteen additional current and former directors and officers as defendants. On December 17, 2013, we filed a motion to dismiss the consolidated amended complaint.   
In March 2013, James Gould filed a derivative complaint on behalf of the Company against us and certain of our current and former directors and former officers. The complaint alleges, among other things, that certain of our current and former directors and former officers committed a breach of fiduciary duty, waste of corporate assets and were unjustly enriched in relation to similar factual allegations made in the 10b-5 Cases. The plaintiff in this matter seeks compensatory damages, certain corporate governance reforms, certain injunctive relief, disgorgement of the proceeds of certain defendants' profits from the sale of Company stock, and attorneys' fees, among other relief. Pursuant to a court order in May 2013, this matter has been stayed until the outcome of any motion to dismiss in the 10b-5 Cases.
Each of these matters is pending in the United States District Court, Northern District of Illinois.
In August 2013, Abbie Griffin, filed a derivative complaint in the State of Delaware Court of Chancery, on behalf of the Company and all similarly situated stockholders, against the Company, as the nominal defendant, and certain of our current and former directors and former officers. The complaint alleges, among other things, that certain of our current and former directors and former officers committed a breach of fiduciary duty, in relation to similar factual allegations made in the 10b-5 Cases. The plaintiff in this matter seeks compensatory damages, certain corporate governance reforms, certain injunctive relief, and attorneys' fees, among other relief. Pursuant to a court order in August 2013, this matter has been stayed until the outcome of any motion to dismiss in the 10b-5 Cases.
6.4 Liter Diesel Engine Litigation
Plaintiff Steve Darne ("Darne") filed a putative class action lawsuit in May 2013 against Navistar, Inc. and Ford in the United States District Court for the Northern District of Illinois (the "Court"). The complaint seeks to certify a class of United States owners and lessees of Ford vehicles powered by the 6.4L PowerStroke ® engine (and in the alternative purports to certify a class of Illinois owners and lessees) that Navistar, Inc. previously supplied to Ford. Darne alleges that Ford vehicles equipped with a 6.4L engine had numerous design and manufacturing defects and that Navistar, Inc. and Ford knew of such engine problems but failed to disclose them to consumers. Darne asserts claims against Navistar, Inc. based on theories of negligence, deceptive trade practices, consumer fraud, unjust enrichment, and intentional conduct. For relief, Darne seeks compensatory dollar damages sufficient to remedy the alleged defects, compensate the proposed class members for alleged incurred damages, and compensate plaintiff's counsel. Darne also asks the Court to award punitive damages and restitution/disgorgement. In November 2013, Darne filed an amended complaint, only as to Ford. On November 25, 2013, Darne voluntarily dismissed Navistar, Inc. from the case without prejudice. On November 26, 2013, the Court entered an order terminating the case as to Navistar, Inc..
Asbestos and Environmental Matters
Along with other vehicle manufacturers, we have been subject to an increase in the number of asbestos-related claims in recent years. In general, these claims relate to illnesses alleged to have resulted from asbestos exposure from component parts found in older vehicles, although some cases relate to the alleged presence of asbestos in our facilities. In these claims we are not the sole defendant, and the claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. We have strongly disputed these claims, and it has been our policy to defend against them vigorously. It is possible that the number of these claims will continue to grow, and that the costs for resolving asbestos related

26


claims could become more significant in the future. We have also been named a potentially responsible party ("PRP"), in conjunction with other parties, in a number of cases arising under an environmental protection law, the Comprehensive Environmental Response, Compensation, and Liability Act, popularly known as the "Superfund" law. These cases involve sites that allegedly received wastes from current or former Company locations.
EPA Notice of Violation
In February 2012, Navistar, Inc. received a Notice of Violation ("NOV") from the EPA. The NOV pertains to approximately 7,600 diesel engines which, according to EPA, were produced by Navistar, Inc. in 2010 and, therefore, should have met EPA's 2010 emissions standards. Navistar, Inc. previously provided information to EPA showing that the engines were in fact produced in 2009. The NOV contains EPA's conclusion that Navistar, Inc.'s alleged production of the engines in 2010 violated the Federal Clean Air Act. The NOV states that EPA reserves the right to file an administrative complaint or to refer this matter to the U.S. Department of Justice with a recommendation that a civil complaint be filed in federal district court. 
CARB Notice of Violation
In April 2013, Navistar, Inc. received a notice of violation and proposed settlement ("Notice") from the California Air Resources Board ("CARB"). The Notice alleges violations of the California regulations relating to verification of after-treatment devices and proposed civil penalties of approximately $2.5 million, among other proposed settlement terms. Beginning in June 2013, the Company has made settlement offers to CARB and remains in discussions regarding this matter.
Item 4.
Mine Safety Disclosures
Not applicable.

27


PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Securities
Market Information
Our common stock is listed on the New York Stock Exchange ("NYSE"), under the stock symbol "NAV." The following is the high and low market price per share of our common stock from NYSE for each quarter of 2013 and 2012:
Year Ended October 31, 2013
 
High
 
Low
 
Year Ended October 31, 2012
 
High
 
    Low    
1st Quarter
 
$
26.90

 
$
18.78

 
1st Quarter
 
$
45.44

 
$
33.74

2nd Quarter
 
37.65

 
23.25

 
2nd Quarter
 
48.18

 
32.68

3rd Quarter
 
38.81

 
25.56

 
3rd Quarter
 
35.25

 
20.21

4th Quarter
 
39.79

 
31.88

 
4th Quarter(A)
 
26.48

 
18.17

_________________________
(A)
In October 2012, the Company issued 10.67 million shares of common stock at the public offering price of $18.75 per share. For additional information, see Note 17, Stockholders' Deficit, to the accompanying consolidated financial statements.
Number of Holders
As of November 30, 2013, there were approximately 8,450 holders of record of our common stock.
Dividend Policy
Holders of our common stock are entitled to receive dividends when and as declared by the Board of Directors out of funds legally available therefore, provided that, so long as any shares of our preferred stock and preference stock are outstanding, no dividends (other than dividends payable in common stock) or other distributions (including purchases) may be made with respect to the common stock unless full cumulative dividends, if any, on our shares of preferred stock and preference stock have been paid. Under the General Corporation Law of the State of Delaware, dividends may only be paid out of surplus or out of net profits for the year in which the dividend is declared or the preceding year, and no dividend may be paid on common stock at any time during which the capital of outstanding preferred stock or preference stock exceeds our net assets.
Payments of cash dividends and the repurchase of common stock are currently limited due to restrictions contained in our debt agreements. We have not paid dividends on our common stock since 1980 and do not expect to pay cash dividends on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities by us or affiliates during the three months ended October 31, 2013.
Purchases of Equity Securities
There were no purchases of equity securities by us or affiliates during the three months ended October 31, 2013.

28


Stock Performance
The following graph compares the five-year comparison of the cumulative total returns of Navistar International Corporation common stock, the S&P 500 Index, and the S&P Construction, Farm Machinery and Heavy Truck Index.
The comparison graph assumes $100 was invested on October 31, 2008 in our common stock and in each of the indices shown and assumes reinvestment of all dividends. Data is complete through October 31, 2013. Shareholder returns over the indicated period are based on historical data and should not be considered indicative of future shareholder returns.
 
As of October 31,
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
Navistar International Corporation
$
100

 
$
110

 
$
160

 
$
140

 
$
62

 
$
68

S&P 500 Index - Total Returns
100

 
110

 
128

 
138

 
159

 
204

S&P Construction, Farm Machinery, and Heavy Truck Index
100

 
138

 
219

 
241

 
157

 
172

The above graph uses peer group only performance (excludes the Company from the peer group). Peer group indices use beginning of periods' market capitalization weighting. Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2013. Index Data: Copyright Standard and Poor’s, Inc. Used with permission. All rights reserved.

29


Item 6.
Selected Financial Data
Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the notes to the accompanying consolidated financial statements for additional information regarding the financial data presented below, including matters that might cause this data not to be indicative of our future financial condition or results of operations.
In the fourth quarter of 2013 as a result of certain changes to our organizational and reporting structures, we determined our reporting segments consist of: North America Truck, North America Parts, Global Operations, and Financial Services. A detailed description of our segments, products, and services, as well as additional selected financial data is included in "Our Operating Segments" in Item 1, Business, and in Note 16, Segment Reporting, to the accompanying consolidated financial statements.
Beginning in the first quarter of 2013, the Company began reporting the operating results of Workhorse Custom Chassis and certain operating results of the Monaco RV business as discontinued operations. For more information, see Note 2, Discontinued Operations and Other Divestitures. The Selected Financial and Statistical Data from 2012 through 2009 have been recast to reflect this change.
Five-Year Summary of Selected Financial and Statistical Data
 
As of and for the Years Ended October 31,
(in millions, except per share data)
2013
 
2012(A)
 
2011(B)
 
2010
 
2009
RESULTS OF OPERATIONS DATA
 
 
 
 
 
 
 
 
 
Sales and revenues, net
$
10,775

 
$
12,695

 
$
13,641

 
$
11,867

 
$
11,474

Income (loss) from continuing operations before taxes
$
(974
)
 
$
(1,111
)
 
$
435

 
$
338

 
$
441

Income tax benefit (expense)
171

 
(1,780
)
 
1,417

 
(23
)
 
(37
)
Income (loss) from continuing operations
(803
)
 
(2,891
)
 
1,852

 
315

 
404

Loss from discontinued operations, net of tax
(41
)
 
(71
)
 
(74
)
 
(48
)
 
(59
)
Net income (loss)
(844
)
 
(2,962
)
 
1,778

 
267

 
345

Less: Net income attributable to non-controlling interests
54

 
48

 
55

 
44

 
25

Net income (loss) attributable to Navistar International Corporation
$
(898
)
 
$
(3,010
)
 
$
1,723

 
$
223

 
$
320

Amounts attributable to Navistar International Corporation common shareholders:
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
(857
)
 
$
(2,939
)
 
$
1,797

 
$
271

 
$
379

Loss from discontinued operations, net of tax
(41
)
 
(71
)
 
(74
)
 
(48
)
 
(59
)
Net income (loss)
$
(898
)
 
$
(3,010
)
 
$
1,723

 
$
223

 
$
320

Basic earnings (loss) per share:
 
 
 
 
 
 
 

 
 

Continuing operations
$
(10.66
)
 
$
(42.53
)
 
$
24.68

 
$
3.78

 
$
5.34

Discontinued operations
(0.51
)
 
(1.03
)
 
(1.02
)
 
(0.67
)
 
(0.83
)
Net income (loss)
$
(11.17
)
 
$
(43.56
)
 
$
23.66

 
$
3.11

 
$
4.51

Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
(10.66
)
 
$
(42.53
)
 
$
23.61

 
$
3.70

 
$
5.28

Discontinued operations
(0.51
)
 
(1.03
)
 
(0.97
)
 
(0.65
)
 
(0.82
)
Net income (loss)
$
(11.17
)
 
$
(43.56
)
 
$
22.64

 
$
3.05

 
$
4.46

Weighted average number of shares outstanding:
 
 
 
 
 
 
 

 
 

Basic
80.4

 
69.1

 
72.8

 
71.7

 
71.0

Diluted
80.4

 
69.1

 
76.1

 
73.2

 
71.8

BALANCE SHEET DATA
 
 
 
 
 

 
 

 
 

Total assets
$
8,315

 
$
9,102

 
$
12,291

 
$
9,730

 
$
10,028

Long-term debt:(C)
 
 
 
 
 
 
 
 
 
Manufacturing operations
$
2,561

 
$
2,733

 
$
1,881

 
$
1,841

 
$
1,670

Financial services operations
1,361

 
833

 
1,596

 
2,397

 
2,486

Total long-term debt
$
3,922

 
$
3,566

 
$
3,477

 
$
4,238

 
$
4,156

Redeemable equity securities
$
4

 
$
5

 
$
5

 
$
8

 
$
13

 
___________________________
(A) In 2012, the Company recognized net income tax expense of $1.8 billion, which includes an increase in our deferred tax valuation allowance on our U.S. deferred tax assets, partially offset by the release of our deferred tax valuation allowance on our Canadian deferred tax assets.
(B) In 2011, the Company recognized an income tax benefit of $1.5 billion from the release of a portion of our deferred tax valuation allowance on our U.S. deferred tax assets.
(C) Exclusive of current portion of long-term debt.

30


Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") is designed to provide information that is supplemental to, and should be read together with, our consolidated financial statements and the accompanying notes. Information in MD&A is intended to assist the reader in obtaining an understanding of (i) our consolidated financial statements, (ii) the changes in certain key items within those financial statements from year-to-year, (iii) the primary factors that contributed to those changes, (iv) any changes in known trends or uncertainties that we are aware of and that may have a material effect on our future performance, and (v) how certain accounting principles affect our consolidated financial statements. In addition, MD&A provides information about our business segments and how the results of those segments impact our results of operations and financial condition as a whole.
Executive Summary
Beginning in 2012, we renewed our focus on our primary, Traditional markets, which are North American Class 6 through 8 trucks and buses, and began an initiative to realign the Company around a more functionally-oriented structure in order to reduce overhead expenses and other costs. We implemented a Return-on-Invested-Capital ("ROIC") methodology combined with an assessment of the strategic fit with our core business, to identify areas that are under-performing or are non-strategic. We are working to fix, divest or close under-performing and non-strategic areas and expect to realize incremental benefits from these actions in the near future. In addition, we are restructuring our business and rationalizing our Manufacturing operations in an effort to optimize our cost structure. This effort is ongoing, and may lead to additional divestitures of businesses or discontinuing engineering programs that are outside of our core operations or not performing to our expectations. During 2013, we continued our ongoing efforts of realigning our management structure around the functional expertise needed to execute our core North American strategy. In the fourth quarter of 2013, we completed certain changes to our organizational and reporting structures. We believe this realignment will result in better execution of our strategies, streamline the decision making process, create better alignment towards a common objective, and reduce our operating costs.
During the past couple of years, we experienced significant strategic and operational challenges, but have taken actions that we believe will improve our future performance. We continue to evaluate additional opportunities to enhance value. We announced changes to our engine strategy, signed supply agreements with Cummins, and reinforced our cash position during this transition period. We are making steady progress in our six guiding principles of customer satisfaction, great products, quality, reduced cost, people, and urgency. Following our six guiding principles, the entire organization remains aligned around our "Drive-to-Deliver" turnaround plan, which set the stage for our 2013 accomplishments and our expectations going forward.
Our 2013 Accomplishments
Following our Drive-to-Deliver plan, we made substantial progress during 2013 on our top priorities:
I.
Improve quality—We moved with urgency to address quality issues in our existing product portfolio, as well as implemented new quality controls and testing systems. For example, during 2013, we logged nearly four million test miles on the International® ProStar® trucks powered by our Certified MaxxForce 13L engine (defined below).
II.
Hit our launches—We achieved several milestones, which included achieving EPA certification using an existing SCR technology, getting to market products that incorporate existing SCR technology while expanding our engine options, and revamping our heavy-duty truck portfolio. Specific examples include:
We met our first major engine strategy milestone with the launch of certain Class 8 truck models featuring the Cummins ISX15 engine, which includes their after-treatment system, in December 2012.
In April, we met another major engine strategy milestone with the receipt of EPA certification of our MaxxForce 13L Big-Bore engines incorporating the Cummins SCR after-treatment system (the "Certified MaxxForce 13L engine"). Later in that same month, we began shipping our International® ProStar® trucks powered by our Certified MaxxForce 13L engine. Also in April, we received on-board diagnostics ("OBD") certification for all current applications.
III.
Deliver on our 2013 plan—We demonstrated discipline with regards to the cash of our Manufacturing operations, where we met our guidance each quarter of 2013. We made tough decisions to reduce operating costs and made significant progress on our benchmarking study and ROIC evaluation initiative. We changed our leadership, which resulted in blending our internal expertise with an outside perspective.
In 2012, we implemented a number of cost-reduction actions to control spending across the Company, including reductions in discretionary spending and employee headcount reductions. As a result, our operating costs, which include selling, general and administrative ("SG&A") expenses and engineering and product development costs, decreased by $330 million in 2013, compared to the prior year. Also throughout 2013, we initiated various additional cost-reduction actions that were identified by our benchmarking study. Specifically in September, we leveraged efficiencies identified through redesigning our organizational structure and began implementing new cost-reduction

31


initiatives, including an enterprise-wide reduction-in-force, which we expect will contribute an estimated $50 million to $60 million of annual savings beginning in 2014.
The ROIC evaluation initiative drove our decisions to divest: (i) our interests in Mahindra Navistar Automotives Ltd. and Mahindra-Navistar Engines Private Ltd. (collectively, the "Mahindra Joint Ventures") in February, (ii) the Workhorse Custom Chassis ("WCC") business in March, (iii) substantially all of our interest in certain operations of the Monaco RV business in May, and (iv) the Bison Coach trailer manufacturing business ("Bison Coach") in October. We also entered into an agreement to sublease a portion of our manufacturing facility in Cherokee, Alabama. Additionally, we began rationalizing certain engineering and product development programs due in part to changes in our engine strategy and renewed focus on our core business of the North American truck and bus markets.
In connection with our renewed focus on the North America market, we have realigned our leadership and management structure around functional expertise. We believe this realignment will result in better execution of our strategies by facilitating faster decision making, driving greater accountability and transparency, creating better alignment towards common objectives, and reducing our operating costs. As a result of the progress we have made with this realignment, we determined our reporting segments changed in the fourth quarter of 2013.
IV.
Build sales momentum—In our Traditional markets, we have seen a strong response to our new truck offerings. As of October 31, 2013, our backlog of unfilled truck orders in our Traditional markets increased by 26% compared to October 31, 2012. We have seen an increase in our order share in the second half of 2013 compared to the first half of the year. We believe this momentum will continue to be fueled by offering the Cummins ISB 6.7 liter engine (the "Cummins ISB") in our International® DuraStar® medium-duty trucks and IC Bus™ CE Series school buses. Initial production of DuraStar® and CE Series school buses, incorporating the Cummins ISB, is expected to begin during our first quarter of 2014.
Our Expectations Going Forward
We believe we are well-positioned to build upon our 2013 accomplishments and take them to the next level:
I.
Lead in vehicle uptime—Quality remains at the forefront of our customer-focused approach. We believe our quality will continue to improve and our trucks will be market leaders in uptime and fuel economy with the lowest cost of ownership. Going forward, we believe we are building the best trucks in our Company's history.
II.
Lean enterprise—We are utilizing a customer-focused redesign of our trucks to find new ways to reduce costs and add value for our customers. We are eliminating waste and driving functional excellence to achieve continuous improvement. We expect these steps will build customer satisfaction, lower our break-even point, and drive profitability at all points in the cycle.
III.
Financial growth—We expect the increases seen in our orders and backlogs in our Traditional markets will translate to increased volumes and market share in the future. Due to our focus on reducing costs through manufacturing optimization, eliminating waste, and addressing the opportunities identified by benchmarking studies, we expect to lower manufacturing costs, increase capacity utilization and productivity, and achieve a lower cost structure. We also expect to continue to enhance our liquidity and profitability. As a result of these actions, we expect to improve our financial performance and achieve our long-term financial goals.
IV.
Profitable improvements in market share—We expect the sales momentum that began in late 2013 to continue with new and improved products, volume growth, and effective pricing. We intend to move steadily closer towards having a full-product portfolio with the SCR after-treatment technology. We expect to continue our product differentiation with enhanced features and options that will benefit our customers and help drive profitable market share improvements.
2013 Financial Summary
Continuing Operating Results
In 2013, we continued to experience significant under-performance in our operating results. Our consolidated net sales and revenues were $10.8 billion in 2013, which is a decrease of 15% compared to 2012. This decrease reflects lower net sales in our North America Truck segment and our Global Operations segment. The North America Truck segment sales decrease was primarily due to decreased volumes in our Traditional market, reflecting reduced sales volumes as we transition our engine strategy, and lower military sales. The Global Operations segment net sales decrease was primarily due to lower volumes of truck sales.
In 2013, we incurred a loss from continuing operations before income taxes of $974 million, compared to a loss of $1.1 billion in 2012. The improvements in our comparative results were primarily driven by lower SG&A expenses, engineering and product development costs, and restructuring charges. These decreases were partially offset by the impacts of the declines in

32


our consolidated net sales and revenues and higher asset impairment charges. During this period of lower sales volumes, we have successfully reduced our SG&A expenses by 14% and our engineering and product development costs by 24%. The SG&A expense reduction reflects the realization of savings from our cost-reduction initiatives, while the reduction in engineering and product development costs reflects savings from project rationalization of certain engineering programs and other efforts. In the fourth quarter of 2013, our North America Truck segment recorded a non-cash charge of $77 million to reflect the impairment of goodwill in our North America truck reporting unit.
In 2013, we recorded a gain of $26 million related to the February 2013 sale of the Company's interests in the Mahindra Joint Ventures. In 2012, the Company incurred equity losses related to the Mahindra Joint Ventures of $34 million. Additionally in 2013, we recorded a gain of $35 million from a legal settlement. Offsetting these factors was an increase in interest expense of $62 million in 2013 which is primarily due to the increase in our outstanding debt.
In 2013, we recognized an income tax benefit from continuing operations of $171 million, compared to expense of $1.8 billion in 2012. In the fourth quarter of 2013, the Company recognized an income tax benefit of $220 million as a result of meeting the criteria necessary to apply the exception within the intraperiod tax allocation rules. In 2012, we recognized income tax expense of $2.0 billion for the increase in our deferred tax valuation allowances on our U.S. deferred tax assets, partially offset by income tax benefit of $189 million, which resulted from the release of a significant portion of our income tax valuation allowance on our Canadian deferred tax assets.
In 2013 after income taxes, the Company incurred a loss from continuing operations attributable to Navistar International Corporation of $857 million, or $10.66 per diluted share, compared to a loss of $2.9 billion, or $42.53 per diluted share, for 2012. In 2013, the weighted average shares outstanding used to calculate the per share amounts increased by 11.3 million, primarily due to the October 2012 issuance of our common stock in a public offering.
Liquidity
We ended the fourth quarter of 2013 with $1.59 billion of consolidated cash, cash equivalents and marketable securities, compared to $1.55 billion as of October 31, 2012. In October 2013, we completed the private sale of $200 million of 4.5% senior subordinated convertible notes due October 2018 ("2018 Convertible Notes"). Also in October 2013, our Financial Services operations made an intercompany loan of $270 million to our Manufacturing operations, utilizing existing credit facilities. The Company expects to use the proceeds from the 2018 Convertible Notes for general corporate purposes, which, together with the intercompany loan, may include the repayment of the $570 million of 3.00% senior subordinated convertible notes due October 2014 ("2014 Convertible Notes").
During the second quarter of 2013, we amended our Term Loan Credit Facility whereby we lowered our interest rate and modified the maturity date to August 17, 2017. We also utilized proceeds from the issuance of $300 million of additional 8.25% Senior Notes, due 2021 (the "Senior Notes") to make a principal repayment of $300 million against our Term Loan Credit Facility.
Business Outlook and Key Trends
We continually look for ways to improve the efficiency and performance of our operations. Our focus is on improving our core North America Truck and Parts businesses. We are also continuing to evaluate opportunities to restructure our businesses and rationalize our Manufacturing operations in an effort to optimize our cost structure which could include, among other actions, additional rationalization of our Manufacturing operations and/or divesting of non-core businesses. These actions could result in additional restructuring and other related charges, including but not limited to, impairments, employee termination costs, and charges for pension and other postretirement contractual benefits and pension curtailments, that could be significant.
Certain trends have affected our results of operations for 2013 as compared to 2012 and 2011. In addition, we expect that the following key trends will impact our future results of operations:
Segment Realignment—In connection with our renewed focus on our primary markets, we have realigned our management and reporting structure around functional expertise. We believe this realignment will result in better execution of our strategies by facilitating faster decision making, driving greater accountability and transparency, creating better alignment towards common objectives and reducing our operating costs. With the completion of changes in the fourth quarter of 2013, our reporting segments changed to the following segments, which reflect how our new Chief Operating Decision Maker ("CODM") assesses the performance of our operating segments and makes decisions about resource allocations:
North America Truck—This segment manufactures and distributes Class 4 through 8 trucks, buses, and military vehicles under the International and IC brands, along with production of engines under the MaxxForce brand name, in the North America markets that include sales in the U.S., Canada, and Mexico. In an effort to strengthen and maintain our dealer network, this segment occasionally acquires and operates dealer locations for the purpose of transitioning ownership.

33


North America Parts—This segment provides customers with proprietary products needed to support the International commercial and military truck, IC Bus, MaxxForce engine lines, as well as our other product lines. Our North America Parts segment also provides a wide selection of other standard truck, trailer, and engine aftermarket parts. At October 31, 2013, this segment operated eleven regional parts distribution centers that provide 24-hour availability and shipment. Also included in the North America Parts segment are the operating results of BDP, which manages the sourcing, merchandising, and distribution of certain service parts we sell to Ford in North America.
Global Operations—This segment includes businesses that derive their revenue from outside our core North America markets and primarily consists of the IIAA (formerly MWM) engine and truck operations in Brazil and our export truck and parts businesses. The IIAA engine operations produce diesel engines, primarily under contract manufacturing arrangements, as well as under the MWM brand, for sale to OEMs in South America.
Financial Services—This segment provides retail, wholesale, and lease financing of products sold by the North America Truck and North America Parts segments and their dealers within the U.S. and Mexico, as well as financing for wholesale accounts and selected retail accounts receivable.
Engine Strategy and Emissions Standards Compliance—We believe that our new strategy of integrating our engines with the Cummins’ SCR after-treatment solution, coupled with offering the Cummins ISB and ISX engines, positions the Company for future success. We expect this strategy will help to address uncertainty around the continuation of product offerings, which had a detrimental impact on the Company's performance, including a deterioration of market share. The Company has incurred significant research and development and tooling costs to design and produce our product lines to meet the EPA and CARB on-highway heavy-duty diesel ("HDD") emissions standards, including OBD requirements. These emissions standards have and will continue to result in significant increases in costs of our products.
Traditional Truck Market—The Traditional truck markets in which we compete are typically cyclical in nature and are strongly influenced by macro-economic factors such as industrial production, demand for durable goods, capital spending, oil prices and consumer confidence. We anticipate the Traditional truck industry retail deliveries will be in the range of 300,000 units to 335,000 units for 2014. We expect benefits from further improvements in our Traditional volumes as the truck industry continues to recover from the historic lows experienced in the recent past. According to ACT Research, the average age of truck fleets still remains high. We anticipate higher sales in 2014, resulting from truck replacement as our customers refresh aging fleets. We also expect demand for trucks to increase as freight volumes and rates continue to improve as the U.S. economy recovers.
Worldwide Engine Unit Sales—Our worldwide engine unit sales were 185,400 units in 2013, 199,900 units in 2012, and 243,600 units in 2011. Our 2013 and 2012 worldwide engine unit sales were primarily to external customers in South America and our North America Truck segment. Principally in our South America operations, we also made certain other OEM sales for the contract manufacturing of engines for commercial, consumer, and specialty vehicle products. We expect our South American operations to continue to be a key contributor to the Global Operations segment and expect improvements from our OEM sales for commercial, consumer, and specialty vehicle products. In North America during 2013, we integrated the Cummins’ urea-based after-treatment systems with our MaxxForce engines. Also in May 2013, our engine joint venture with JAC was fully capitalized and became operational. We continued to make investments in engineering and product development for our proprietary engines for product innovations, cost-reductions, and fuel economy. Our markets are impacted by consumer demand for products that use our engines, as well as macro-economic factors such as oil prices and construction activity.
Military Sales—Our U.S. military sales were $541 million in 2013, compared to $1.0 billion in 2012 and $1.8 billion in 2011. The 2013 and 2012 military sales primarily consisted of upgrading Mine Resistant Ambush Protected ("MRAP") vehicles with our rolling chassis solution and retrofit kits. In comparison, our 2011 sales consisted of delivering, servicing, and maintaining MRAP vehicles, lower-cost militarized commercial trucks, and sales of parts and services. In 2014, we expect our U.S. military sales to continue to decline. Contributing to the decline are the budgetary constraints experienced by the U.S. government.
Warranty Costs—Emissions regulations in the U.S. and Canada have resulted in rapid product development cycles, driving significant changes from previous engine models. In 2010, we introduced changes to our engine line-up in response to 2010 emissions regulations. Component complexity and other related costs associated with meeting emissions standards have contributed to higher repair costs that exceeded those that we have historically experienced. Historically, warranty claims experience for launch-year engines has been higher compared to the prior model-year engines; however, over time we have been able to refine both the design and manufacturing process to reduce both the volume and the severity of warranty claims. While we continue to improve the design and manufacturing of our engines to reduce the volume and severity of warranty claims, we have continued to experience higher warranty costs than expected which has contributed to significantly higher warranty charges for current and pre-existing warranties, including charges for extended service contracts, in 2012. We recognized adjustments to pre-existing warranties of $404 million in both 2013 and 2012, compared

34


to adjustments of $79 million in 2011. These adjustments to pre-existing warranties relate to the unanticipated increase in warranty expense, primarily for certain 2010 emission standard engines. We may continue to experience an increase in warranty costs as compared to prior periods that could result in additional charges for adjustments to pre-existing warranties. In addition, as we identify opportunities to improve the design and manufacturing of our engines, we may incur additional charges for product recalls and field campaigns to address identified issues. These charges may have an adverse effect on our financial condition, results of operations and cash flows. For more information, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Operating Cost Saving Initiatives—We continue to evaluate opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure. We have implemented a number of cost saving initiatives, including the consolidation of our North America Truck and Engine engineering operations, the relocation of our world headquarters to Lisle, Illinois, continued reductions in discretionary spending and employee headcount reductions. As a result, our operating costs, which include SG&A expenses and engineering and product development costs, decreased by $330 million in 2013, compared to the prior year. In the fourth quarter of 2013, we leveraged efficiencies identified through redesigning our organizational structure and began implementing new cost-reduction initiatives, including an enterprise-wide reduction-in-force, which we expect will contribute an estimated additional $50 million to $60 million of annual savings beginning in 2014.
Core-Business Evaluation—We are focused on improving our core North America Truck and Parts businesses. In 2012, we implemented an ROIC methodology, combined with an assessment of the strategic fit to our core business, to identify areas that are under-performing or are non-strategic. We are working to fix, divest or close under-performing and non-strategic areas and expect to realize incremental benefits from these actions in the near future. In addition, we are restructuring our business and rationalizing our Manufacturing operations in an effort to optimize our cost structure. This effort is ongoing, and may lead to additional divestitures of businesses or discontinuing engineering programs that are outside of our core operations or are not performing to our expectations.
As a result of these evaluations, in 2013, we divested: our interests in the Mahindra Joint Ventures in February 2013, the WCC business in March 2013, substantially all of our interest in certain operations of the Monaco RV business in May 2013, and Bison Coach in October 2013. We also entered into an agreement to sublease a portion of our manufacturing facility in Cherokee, Alabama. Also in 2013, we completed the consolidation of our testing and validation activities into our Melrose Park, Illinois, facility, and we closed our Garland, Texas truck manufacturing plant. In 2012, we consolidated our executive management, certain business operations, and product development into our world headquarters site in Lisle, Illinois. In July 2011, we announced our intention to close our Chatham, Ontario truck manufacturing plant, our Union City, Indiana chassis plant, and our Monaco motor coach plant in Coburg, Oregon, which was subsequently sold in 2012. We continue to evaluate our options to optimize our operations. We expect to realize incremental benefits from these actions in the near future.
Global Economy—The global economy, and in particular the economies in the U.S. and Brazil markets, are continuing to recover, and the related financial markets have stabilized. However, the impact of the economic recession and financial turmoil on the global markets pose a continued risk as customers may postpone spending, in response to tighter credit, negative financial news, and/or declines in income or asset values. Lower demand for our customers' products or services could also have a material negative effect on the demand for our products. In addition, there could be exposure related to the financial viability of certain key third-party suppliers, some of which are our sole source for particular components. Lower expectations of growth and profitability have resulted in impairments of long-lived assets in the past and we could continue to experience pressure on the carrying values of our assets if conditions persist for an extended period of time.
Impact of Government Regulation—As a manufacturer of trucks and engines, we continue to face significant governmental regulation of our products, especially in the areas of environmental and safety matters. We are also subject to various noise standards imposed by federal, state, and local regulations. Government regulation related to climate change is under consideration at the U.S. federal and state levels. Because our products use fossil fuels, they may be impacted indirectly due to regulation, such as a cap and trade program, affecting the cost of fuels. In 2010, the initial phase-in of OBD requirements commenced for the initial family of truck engines and those products have been certified. The phase-in for the remaining engine families occurred in 2013. In 2011, the EPA and NHTSA issued final rules setting greenhouse gas emissions and fuel economy standards for medium and heavy-duty engines and vehicles, which begin to apply in 2014 and are fully implemented in model year 2017. The next phase of federal greenhouse gas emission and fuel economy rules are currently under discussion and anticipated for the 2020 model year. California is also in the initial stages of considering greenhouse gas emission rules for heavy duty vehicles. The Company plans to comply with these rules through the use of our existing technologies combined with certain third-party components, as well as the implementation of emerging technologies as they become available. As a result, the Company expects to incur additional engineering and product development expenses to comply with these rules.

35


Results of Continuing Operations
The following information summarizes our Consolidated Statements of Operations and illustrates the key financial indicators used to assess our consolidated financial results. Beginning in the first quarter of 2013, the Company began reporting the operating results of WCC and certain operating results of Monaco as discontinued operations. For more information, see Note 2, Discontinued Operations and Other Divestitures, to the accompanying consolidated financial statements. The Company's previously issued Consolidated Statements of Operations have been recast to reflect this change.
Results of Operations for the year ended October 31, 2013 as Compared to the year ended October 31, 2012
(in millions, except per share data and % change)
2013
 
2012
 
Change
 
%
Change
Sales and revenues, net
$
10,775

 
$
12,695

 
$
(1,920
)
 
(15
)%
Costs of products sold
9,761

 
11,401

 
(1,640
)
 
(14
)%
Restructuring charges
25

 
107

 
(82
)
 
(77
)%
Asset impairment charges
97

 
16

 
81

 
506
 %
Selling, general and administrative expenses
1,215

 
1,419

 
(204
)
 
(14
)%
Engineering and product development costs
406

 
532

 
(126
)
 
(24
)%
Interest expense
321

 
259

 
62

 
24
 %
Other expense (income), net
(65
)
 
43

 
(108
)
 
N.M.

Total costs and expenses
11,760

 
13,777

 
(2,017
)
 
(15
)%
Equity in income (loss) of non-consolidated affiliates
11

 
(29
)
 
40

 
N.M.

Loss from continuing operations before income taxes
(974
)
 
(1,111
)
 
137

 
(12
)%
Income tax benefit (expense)
171

 
(1,780
)
 
1,951

 
(110
)%
Loss from continuing operations
(803
)
 
(2,891
)
 
2,088

 
(72
)%
Less: Net income attributable to non-controlling interests
54

 
48

 
6

 
13
 %
Loss from continuing operations(A)
(857
)
 
(2,939
)
 
2,082

 
(71
)%
Loss from discontinued operations, net of tax
(41
)
 
(71
)
 
30

 
(42
)%
Net loss(A)
$
(898
)
 
$
(3,010
)
 
$
2,112

 
(70
)%
 
 
 
 
 
 
 
 
Diluted loss per share:(A)
 
 
 
 
 
 
 
Continuing operations
$
(10.66
)
 
$
(42.53
)
 
$
31.87

 
(75
)%
Discontinued operations
(0.51
)
 
(1.03
)
 
0.52

 
(50
)%
 
$
(11.17
)
 
$
(43.56
)
 
$
32.39

 
(74
)%
Diluted weighted average shares outstanding
80.4

 
69.1

 
11.3

 
16
 %
_________________________
N.M.
Not meaningful.
(A)
Amounts attributable to Navistar International Corporation.
Sales and revenues, net
Our sales and revenues, net, are principally generated via sales of products and services. Sales and revenues, net, by reporting segment were as follows:
(in millions, except % change)
2013
 
2012
 
Change
 
%
Change
North America Truck
$
6,798

 
$
8,388

 
$
(1,590
)
 
(19
)%
North America Parts
2,615

 
2,621

 
(6
)
 
 %
Global Operations
1,825

 
2,210

 
(385
)
 
(17
)%
Financial Services
233

 
259

 
(26
)
 
(10
)%
Corporate and Eliminations
(696
)
 
(783
)
 
87

 
(11
)%
Total
$
10,775

 
$
12,695

 
$
(1,920
)
 
(15
)%
The North America Truck segment net sales decrease of $1.6 billion, or 19%, compared to the prior year period, was primarily due to decreased truck volumes in our Traditional market, reflecting the impact of the transition of our engine strategy, the impact of lower industry volumes, and lower military sales.
The North America Parts segment net sales decrease of $6 million was primarily due to lower military sales, partially offset by pricing improvements in the commercial markets.

36


The Global Operations segment net sales decrease of $385 million, or 17%, was primarily due to lower volumes of truck sales, particularly in Colombia.
The Financial Services segment net revenues decrease of $26 million, or 10%, was primarily driven by the continued decline in the average finance receivable balances which is reflective of the GE Operating Agreement.
Costs of products sold
The Cost of products sold decrease of $1.6 billion, compared to the prior year, reflects the impact of lower net sales in our North America Truck and Global Operations segments.
Charges for adjustments to pre-existing warranties continued to be higher than those that we have historically experienced. In 2013 and 2012, we recognized charges for adjustments to pre-existing warranties of $404 million in both periods. These charges were primarily related to certain 2010 emission standard engines, which included charges related to extended warranty contracts on our MaxxForce Big-Bore engines, as well as costs related to certain field campaigns we initiated to address issues in products sold. Future warranty experience, pricing of extended warranty contracts, and external market factors may cause us to recognize additional charges as losses on extended service contracts in future periods. For more information, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Restructuring charges
In 2013, we incurred restructuring charges of $25 million, which were primarily related to the actions we took in the fourth quarter of 2013 that included an enterprise-wide reduction-in-force. In 2012, we incurred restructuring charges of $107 million, primarily due to cost-reduction initiatives that included the Company's offering a voluntary separation program ("VSP") to the majority of our U.S.-based non-represented salaried employees and the impacts of an involuntary reduction-in-force in the U.S. and Brazil, as well as integration costs that included a lease vacancy charge relating to the relocation of our world headquarters. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Asset impairment charges
In 2013, we recorded asset impairment charges of $97 million, compared to $16 million in 2012. In 2013, the North America Truck segment recognized charges of: (i) a $77 million charge related to the impairment of goodwill in our North America truck reporting unit, and (ii) $19 million of other asset impairment charges, which were primarily the result of our ongoing evaluation of our portfolio of assets to validate their strategic and financial fit, which led to the discontinuation of certain engineering programs related to products that were determined to be outside of our core operations or not performing to our expectations. In 2012, the North America Parts segment recognized a charge of $10 million for the impairment of certain intangible assets related to the parts distribution operations associated with the WCC business. For more information on the impairment of goodwill, see Note 8, Goodwill and Other Intangible Assets, Net, and for more information on the other asset impairment charges, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Selling, general and administrative expenses
The SG&A expenses decrease of $204 million reflects the impact of our cost-reduction initiatives, partially offset by higher employee incentive compensation expense. In the fourth quarter of 2012, we offered the majority of our U.S.-based non-represented salaried employees the opportunity to apply for a VSP. Along with the VSP, we used attrition and an involuntary reduction-in-force in the U.S. to eliminate additional positions in order to meet our targeted reductions goal. In addition to these actions in the U.S., our Brazilian operations utilized an involuntary reduction in force to eliminate positions. These actions, as well as the elimination of certain executive-level positions, contributed to the decrease in SG&A expenses.
Also in the fourth quarter of 2013, the Company leveraged efficiencies identified through redesigning our organizational structure and began implementing new cost-reduction initiatives, including an enterprise-wide reduction-in-force. As a result, we expect to realize additional year-over-year savings in 2014. For more information concerning our cost-reduction initiatives, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Engineering and product development costs
The Engineering and product development costs decrease of $126 million reflects lower costs in the North America Truck and Global Operations segments, primarily due to project rationalization of certain engineering programs and other savings from our 2012 cost-reduction initiatives. These decreases were partially offset by higher costs in the North America Truck segment, primarily for integration of the Cummins SCR after-treatment systems with our MaxxForce 13L engine and other engine models.

37


Interest expense
The interest expense increase in 2013 of $62 million was primarily due to the increase in our outstanding debt balances, particularly under our Amended Term Loan Credit Facility. This impact was partially offset by the reduction in debt utilized in financing of retail finance receivables balances, which reflects the GE Operating Agreement, through which GE funds most of the new U.S. retail loan originations. For more information on our debt obligations, see Note 10, Debt, to the accompanying consolidated financial statements.
Also contributing to the increase was the recognition of interest expense related to certain third-party equipment financings by GE, which we have accounted for as borrowings. In the second quarter of 2013, the Company recorded certain out-of-period adjustments for the correction of prior-period errors, which included $8 million of interest expense related to periods prior to 2013. For more information, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Other expense (income), net
We recognized other net income of $65 million in 2013 compared to other net expense of $43 million in 2012. In 2013, the net income included gains of: (i) $35 million related to our legal settlement with Deloitte and Touche LLP, (ii) $26 million related to the sale of the Company's interests in the Mahindra Joint Ventures, and (iii) $16 million related to the sale of Bison Coach, partially offset by: (i) $13 million of charges related to the $300 million principal repayment of a portion of the Term Loan Credit Facility, which primarily consisted of the write-off of related discount and debt issuance costs and a prepayment premium fee, and (ii) the unfavorable impact of fluctuations of foreign exchange rates, particularly in the Global Operations and North America Truck segments due to the weakening of the Brazilian Real and Canadian Dollar against the U.S. Dollar. For more information concerning: (i) the sale of the Mahindra Joint Ventures and Bison Coach, see Note 2, Discontinued Operations and Other Divestitures, (ii) the $300 million principal repayment, see Note 10, Debt, and (iii) the legal settlement, see Note 15, Commitments and Contingencies, all to the accompanying consolidated financial statements.
In 2012, the Company was also unfavorably impacted by the fluctuations of foreign exchange rates, primarily due to the weakening of the Brazilian Real against the U.S. Dollar. Additionally, the Company recognized costs related to the early redemption of a portion of our Senior Notes, which include charges of $8 million for the early redemption premium and write-off of related discount and debt issuance costs. For more information, see Note 10, Debt, to the accompanying consolidated financial statements.
Equity in income (loss) of non-consolidated affiliates
We recognized net income from our equity interest in non-consolidated affiliates of $11 million in 2013 compared to net losses of $29 million in 2012. The losses recognized in the prior period were primarily attributable to our Mahindra Joint Ventures, which we sold in the second quarter of 2013. For more information, see Note 2, Discontinued Operations and Other Divestitures, to the accompanying consolidated financial statements.
Income tax expense (benefit)
In 2013, we recognized an income tax benefit from continuing operations of $171 million, compared to expense of $1.8 billion in 2012. In the fourth quarter of 2013, the Company met the criteria necessary to apply the exception within the intraperiod tax allocation rules, since we incurred a loss from continuing operations and income was recognized in both Total other comprehensive income (loss) and Additional paid in capital. As a result, the Company recorded income tax benefit of $220 million was recorded in Income tax benefit (expense) related to continuing operations, and an offsetting tax expense of $212 million and $8 million in Total other comprehensive income (loss) and Additional paid in capital, respectively. In 2012, we recognized income tax expense of $2.0 billion for the increase in our deferred tax valuation allowances on our U.S. deferred tax assets. This was partially offset by income tax benefit of $189 million, which resulted from the release of a significant portion of our income tax valuation allowance on our Canadian deferred tax assets.
We had $1.7 billion of U.S. federal net operating losses and $242 million of federal tax credit carryforwards as of October 31, 2013. We expect our cash payments of U.S. taxes will be minimal for as long as we are able to offset our U.S. taxable income by these U.S. net operating losses and tax credits. We maintain valuation allowances on our U.S. and certain foreign deferred tax assets because it is more-likely-than-not those deferred tax assets will not be realized. It is reasonably possible within the next twelve months that an additional valuation allowance may be required on certain foreign deferred tax assets. For more information, see Note 12, Income Taxes, to the accompanying consolidated financial statements.
Net income attributable to non-controlling interests
Net income attributable to non-controlling interests is the result of our consolidation of subsidiaries of which we do not own 100%. Substantially all of our net income attributable to non-controlling interests in 2013 and 2012 relates to Ford's non-controlling interest in our BDP subsidiary.

38


Loss from discontinued operations, net of tax
In 2013, we incurred a loss from discontinued operations of $41 million compared to $71 million in 2012, comprised of the financial results from certain operations of the Monaco business and the WCC operations. In March 2013, we divested our interest in WCC, and in May 2013, we divested substantially all of our interest in the operations of Monaco.
In 2013 in addition to the operating losses from the divested businesses, the loss included charges totaling $24 million, related to the divestiture of Monaco, partially offset by WCC recognizing a warranty recovery of $13 million from a supplier that was related to a product recall. In 2012, the loss also included charges of $28 million for the impairment of certain intangible assets, which resulted from our decision to idle WCC, partially offset by a gain of $6 million due to the sale of the Monaco motor coach plant in Coburg, Oregon. For more information, see Note 2, Discontinued Operations and Other Divestitures, to the accompanying consolidated financial statements.
Segment Results of Continuing Operations for 2013 as Compared to 2012
We operate in four reporting segments: North America Truck, North America Parts, Global Operations (collectively called "Manufacturing operations"), and Financial Services, which consists of Navistar Financial Corporation ("NFC") and our foreign finance operations (collectively called "Financial Services operations").
Beginning in the first quarter of 2013, the Company began reporting the operating results of WCC and certain operating results of Monaco as discontinued operations. The financial information for the prior periods has been restated to reflect this change in presentation. For more information, see Note 2, Discontinued Operations and Other Divestitures, to the accompanying consolidated financial statements.
We define segment profit (loss) as net income (loss) from continuing operations attributable to Navistar International Corporation excluding income tax benefit (expense). For additional information about segment profit, see Note 16, Segment Reporting, to the accompanying consolidated financial statements. The following sections analyze operating results as they relate to our four segments and do not include intersegment eliminations.
North America Truck Segment
(in millions, except % change)
2013
 
2012
 
Change
 
%
Change  
North America Truck segment sales, net
$
6,798

 
$
8,388

 
$
(1,590
)
 
(19
)%
North America Truck segment loss
(902
)
 
(736
)
 
(166
)
 
23
 %
Segment sales
The North America Truck segment net sales decrease of $1.6 billion, or 19%, was primarily due to lower truck volumes across all truck classes in our Traditional market, reflecting reduced sales volumes as we transition our engine strategy, as well as the impact of lower industry volumes. We continued to meet or exceed our scheduled product launches and experienced no production gaps during our transition to our new engine emission strategy in 2013; however, we have experienced lower volumes and, to a lesser extent, some pressure on pricing. Additionally, our military sales were lower reflecting lower chargeouts and service revenue. Chargeouts from our Traditional market were down 21%, reflecting declines in our Class 6 and 7 medium trucks, Class 8 severe service trucks, as well as Class 8 heavy trucks, and to a lesser extent, School buses.
Also in the second quarter of 2013, the Company recorded certain out-of-period adjustments for the correction of prior-period errors, relating to certain third-party equipment financings by GE that we have accounted for as borrowings. Correcting the errors resulted in a decrease of $113 million to net sales related to periods prior to 2013. For more information, see Note 1, Summary of Significant Accounting Policies to the accompanying consolidated financial statements.
Segment loss
The North America Truck segment loss was comparable to the prior year, reflecting the impact of the transition in our engine emission strategy, which has resulted in lower margins and the under-absorption of fixed costs. Also contributing to the segment's loss were charges for adjustments to pre-existing warranties of $404 million and $400 million in 2013 and 2012, respectively. These charges were primarily related to certain 2010 emission standard engines, which included charges related to extended warranty contracts on our MaxxForce Big-Bore engines, as well as costs related to certain field campaigns we initiated to address issues in products sold, partially offset by the recognition of a warranty recovery of $27 million, which occurred in the first quarter of 2013.
Additionally, the segment incurred asset impairment charges of $96 million. The charges consisted of: (i) $77 million of charges related to the impairment of goodwill of our North America truck reporting units, and (ii) $19 million of other asset impairment charges, which were primarily the result of our ongoing evaluation of our portfolio of assets to validate their

39


strategic and financial fit, which led to the discontinuation of certain engineering programs related to products that were determined to be outside of our core operations or not performing to our expectations. For more information on the impairment of goodwill, see Note 8, Goodwill and Other Intangible Assets, Net, and for more information on the other asset impairment charges, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
The North America Truck segment also recognized charges of $41 million for accelerated depreciation of certain assets, which were primarily related to the closure of our Garland, Texas truck manufacturing facility, and the discontinuation of certain engine programs, particularly the MaxxForce15L engine.
In 2013 and 2012, the segment recorded charges of $36 million and $34 million, respectively, for non-conformance penalties ("NCPs"), primarily for certain 13L engines sales. Going forward, we expect the charges for NCPs to decrease due to higher sales of trucks that include our engines with the Cummins SCR after-treatment system, as well as sales of trucks that incorporate the Cummins ISX 15L engine.
Offsetting these factors were declines in SG&A expenses and Engineering and product development costs, as well as lower restructuring charges. The lower SG&A expenses reflect the impact of our 2012 cost-reduction initiatives. The lower Engineering and product development costs were primarily due to project rationalization of certain engineering programs and other savings from cost-reduction initiatives, partially offset by costs to: (i) integrate the Cummins SCR after-treatment systems with our MaxxForce 13L engine and other engine models, (ii) integrate the Cummins ISB into certain truck models, and (iii) rationalize content in our MaxxForce 13L engine.
Also in 2013, the segment recorded restructuring charges of $13 million, compared to $52 million in 2012. These charges were primarily related to cost-reduction initiatives in their respective years, including an enterprise-wide reduction-in-force that resulted in payments of severance and other related benefits. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
In October 2013, the Company sold the Bison Coach trailer manufacturing business, which resulted in the segment recording a gain of $16 million in 2013.
North America Parts Segment
(in millions, except % change)
2013
 
2012
 
Change
 
%
Change  
North America Parts segment sales, net
$
2,615

 
$
2,621

 
$
(6
)
 
 %
North America Parts segment profit
476

 
343

 
133

 
39
 %
Segment sales
The North America Parts segment net sales decrease of $6 million was primarily due to lower military sales, partially offset by pricing improvements in the commercial markets. The decrease in military sales reflects lower sustainment orders, partially offset by higher sales of upgrade kits and the impact of the definitization of pricing on certain contracts.
Segment profit
The increase in North America Parts segment profit of $133 million was primarily driven by margin improvements in our commercial markets and BDP operations, lower SG&A expenses due to the impact of our 2012 cost-reduction initiatives, and the impact the pricing definitization on certain military contracts.
Additionally, the segment incurred a charge of $10 million in the second quarter of 2012 for the impairment of certain intangible assets of the parts distribution operations related to the WCC business. Also in 2012, the North America Parts segment recognized restructuring and other related charges of $7 million for cost-reduction actions. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Global Operations Segment
(in millions, except % change)
2013
 
2012
 
Change
 
%
Change  
Global Operations segment sales, net
$
1,825

 
$
2,210

 
$
(385
)
 
(17
)%
Global Operations segment loss
(6
)
 
(168
)
 
162

 
(96
)%
Segment sales
The Global Operations segment net sales decrease of $385 million, or 17%, was primarily due to lower volumes of truck sales, particularly in Colombia. In our South America engine operations, an increase in volumes and improvements in pricing were

40


offset by the unfavorable impact of fluctuations of foreign exchange rates.
Segment loss
The results for the Global Operations segment improved by $162 million compared to the prior year. The improvement reflects: (i) the impact from the divestiture of our interests in the Mahindra Joint Ventures, (ii) margin improvements in our South American engine operations, (iii) lower Engineering and product development costs at our South American engine operations, due to the completion of the development of certain engines for the Euro V emissions standard and project rationalization of certain other engineering programs, and (iv) lower SG&A expense, which reflects the impact of our cost-reduction initiatives. These improvements were partially offset by lower export truck volumes to South America, particularly Colombia, and the unfavorable impact of fluctuations of foreign exchange rates from our South American operations.
In February 2013, the Company sold its interests in the Mahindra Joint Ventures to Mahindra, which resulted in the segment recording a gain of $26 million. In 2012, the segment incurred an equity loss of $34 million related to the Mahindra Joint Ventures. For more information, see Note 2, Discontinued Operations and Other Divestitures, to the accompanying consolidated financial statements.
Financial Services Segment
(in millions, except % change)
2013
 
2012
 
Change
 
%
Change  
Financial Services segment revenues, net
$
233

 
$
259

 
$
(26
)
 
(10
)%
Financial Services segment profit
81

 
91

 
(10
)
 
(11
)%
Segment revenues
The Financial Services segment net revenues decrease of $26 million, or 10%, was primarily driven by the continued decline in the average finance receivable balance. The decline in the average retail finance receivable balance reflects the GE Operating Agreement, through which GE funds most of the new U.S. retail loan originations, partially offset by increases in retail loan originations in Mexico. The decline in the average wholesale finance receivable balance was primarily due to lower average dealer receivable levels. Partially offsetting these contributors to the decline in revenue was an increase in revenues from operating leases.
Segment profit
The decrease in Financial Services segment profit of $10 million was primarily driven by the lower net financial margin due to the decline in the average finance receivables balances, partially offset by lower employee-related expenses in the U.S. that resulted from our 2012 cost-reduction initiatives. Additionally, in 2013, the Financial Services segment incurred restructuring charges related to the relocation of certain operations to our world headquarters, as well as an increase in the provision for loan losses related to the increase in average finance receivable balances in Mexico.

41


Results of Operations for the year ended October 31, 2012 as Compared to the year ended October 31, 2011
(in millions, except per share data and % change)
2012
 
2011
 
Change
 
%
Change
Sales and revenues, net
$
12,695

 
$
13,641

 
$
(946
)
 
(7
)%
Costs of products sold
11,401

 
10,937

 
464

 
4
 %
Restructuring charges (benefit)
107

 
82

 
25

 
30
 %
Asset impairment charges
16

 
13

 
3

 
23
 %
Selling, general and administrative expenses
1,419

 
1,407

 
12

 
1
 %
Engineering and product development costs
532

 
520

 
12

 
2
 %
Interest expense
259

 
247

 
12

 
5
 %
Other income (expense), net
43

 
(71
)
 
114

 
N.M.

Total costs and expenses
13,777

 
13,135

 
642

 
5
 %
Equity in loss of non-consolidated affiliates
(29
)
 
(71
)
 
42

 
(59
)%
Income (loss) from continuing operations before income taxes
(1,111
)
 
435

 
(1,546
)
 
N.M.

Income tax benefit (expense)
(1,780
)
 
1,417

 
(3,197
)
 
N.M.

Income (loss) from continuing operations
(2,891
)
 
1,852

 
(4,743
)
 
N.M.

Less: Net income attributable to non-controlling interests
48

 
55

 
(7
)
 
(13
)%
Income (loss) from continuing operations
(2,939
)
55

1,797

 
(4,736
)
 
N.M.

Loss from discontinued operations, net of tax
(71
)
 
(74
)
 
3

 
(4
)%
Net income (loss)(A)
$
(3,010
)
$
55

$
1,723

 
$
(4,733
)
 
N.M.

Diluted earnings (loss) per share:(A)
 
 
 
 
 
 
 
Continuing operations
$
(42.53
)
 
$
23.61

 
$
(66.14
)
 
N.M.

Discontinued operations
(1.03
)
 
(0.97
)
 
(0.06
)
 
6
 %
 
$
(43.56
)
 
$
22.64

 
$
(66.20
)
 
N.M.

Diluted weighted average shares outstanding
69.1

 
76.1

 
(7.0
)
 
(9
)%
_________________________
N.M.
Not meaningful.
(A)
Amounts attributable to Navistar International Corporation
Sales and revenues, net
Our sales and revenues, net, are generated via sales of products and services. Sales and revenues, net, by reporting segment were as follows:
(in millions, except % change)
2012
 
2011
 
Change
 
%
Change
North America Truck
$
8,388

 
$
9,163

 
$
(775
)
 
(8
)%
North America Parts
2,621

 
2,740

 
(119
)
 
(4
)%
Global Operations
2,210

 
2,430

 
(220
)
 
(9
)%
Financial Services
259

 
291

 
(32
)
 
(11
)%
Corporate and Eliminations
(783
)
 
(983
)
 
200

 
(20
)%
Total
$
12,695

 
$
13,641

 
$
(946
)
 
(7
)%
North America Truck segment net sales decreased $775 million, or 8%, primarily due to decreases in military sales and Class 6 and 7 medium trucks in our Traditional markets, partially offset by the impact of product mix that included increases in sales of our Class 8 heavy and severe service trucks in our Traditional markets.
North America Parts segment net sales decreased by $119 million, or 4%, primarily due to lower military sales, partially offset by improvements in our commercial markets.
Global Operations segment net sales decreased by $220 million, or 9%, primarily due to lower sales volumes by our South America engine operations, reflecting a pre-buy of pre-Euro V emissions standard engines in the prior year and the impact of unfavorable movements in foreign currency exchange rates, and decreases in our truck exports. These were partially offset by the impact of the consolidation and growth of our NC2 Global, LLC ("NC2") truck and parts operations.

42


Financial Services segment net revenues decreased by $32 million, or 11%, primarily driven by the continued decline in the average retail finance receivable balance. The decline in the average retail finance receivable balance is reflective of a decrease in U.S. retail loan originations, which are now being funded primarily under the GE Operating Agreement.
Costs of products sold
Cost of products sold increased by $464 million, compared to the prior year period, reflecting an increase in the North America Truck segment, partially offset by decreases in the North America Parts segment that were largely reflective of their overall decrease in net sales. The increase in cost of products sold in the North America Truck segment was largely due to higher current and pre-existing warranty costs, partially offset by lower volumes. Component complexity and other related costs associated with meeting emissions standards has contributed to higher repair costs that exceeded those that we have historically experienced. Further contributing to the higher warranty expense and the associated increase in warranty costs per unit were shifts in product mix to higher cost engines. We recognized charges for adjustments to pre-existing warranties of $404 million in 2012, compared to $79 million the prior year. The increase in the adjustments relates to the unanticipated increases in warranty spend, primarily for certain 2010 emission engines. While we continued to improve the design and manufacturing of our engines to reduce the volume and severity of warranty claims, we continued to experience higher warranty spend than expected. Included in 2012 warranty expense, was $130 million of charges related to field campaigns we initiated to address issues in products sold, as compared to $23 million in the prior year. The charges were primarily recognized as adjustments to pre-existing warranties. For more information, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Additionally, the increase in cost of products sold in the North America Truck segment reflects shifts in product mix and cost increases for materials largely due to higher costs for steel and rubber. Offsetting these factors were a decrease in military volumes and a shift in military product mix, as well as benefits from manufacturing cost efficiencies largely due to our flexible manufacturing strategy and other actions.
Restructuring charges
Restructuring charges were $107 million in 2012, compared to $82 million in 2011. The charges consisted of:
(in millions, except % change)
2012
 
2011
 
Change
 
%
Change
Engineering integration costs
$
23

 
$
29

 
$
(6
)
 
(21
)%
Restructuring of North American manufacturing operations
6

 
48

 
(42
)
 
(88
)%
Voluntary separation program and reduction-in-force
73

 

 
73

 
N.M.

Other
5

 
5

 

 
 %
Restructuring charges
$
107

 
$
82

 
$
25

 
30
 %
The restructuring charges in 2012 were primarily related to cost-reduction initiatives that included the Company's offering of the VSP to the majority of our U.S.-based non-represented salaried employees and the impacts of an involuntary reduction in force in the U.S. and Brazil, as well as integration costs, which include a lease vacancy charge relating to the relocation of our world headquarters. The restructuring charges in 2011 were primarily related to the actions taken in 2011 at our Fort Wayne facility, Springfield Assembly Plant, Chatham heavy truck plant, WCC plant in Union City, Indiana, and Monaco recreational vehicle headquarters and motor coach manufacturing plant in Coburg, Oregon, all within our North America Truck segment. For more information on the programs described above, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Asset impairment charges
In 2012, we incurred asset impairment charges of $16 million, which included a charge of $10 million for the impairment of certain intangible assets related to the parts distribution operations associated with the WCC business, recognized by the North America Parts segment. In 2011, we recognized impairments of property and equipment and intangible assets of $13 million, primarily in our North America Truck segment, relating to charges at our Chatham, Ontario plant, reflecting the impact of the closure of the facility. For more information on these impairments, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Selling, general and administrative expenses
SG&A expenses increased by $12 million in 2012, compared to the prior year periods. This increase in SG&A expenses reflected an increase in postretirement benefit expenses, as well as higher expenses related to the consolidation of the truck and engine engineering operations and the relocation of our world headquarters. The increase in postretirement benefit expenses was primarily due to reinstating the prescription drug benefit provided under the 1993 Settlement Agreement in accordance

43


with a court ruling in September 2011. For more information, see Note 15, Commitments and Contingencies, to the accompanying consolidated financial statements. Partially offsetting these increases was a decrease in employee incentive compensation expense, reflecting the losses incurred in 2012, and savings from cost-reduction initiatives.
In addition to the factors described above, the decrease in the North America Truck segment also reflected lower Dealcor expenses due to the sale of certain dealerships, partially offset by higher provisions for receivables losses and higher advertising and promotional expenses. The decrease in the Global Operations segment also reflected lower administrative expenses relating to cost-reduction initiatives, particularly in South America, partially offset by the consolidation of the NC2 operations.
In the fourth quarter of 2012, we offered the majority of our U.S.-based non-represented salaried employees the opportunity to apply for a VSP. Along with the VSP, we used attrition and an involuntary reduction in force to eliminate additional positions in order to meet our targeted reductions goal. In addition to these actions in the U.S., our Brazilian operations utilized an involuntary reduction-in-force to eliminate positions. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Engineering and product development costs
Engineering and product development costs increased by $12 million, compared to the prior year period, reflecting higher costs in the North America Truck segment and lower costs in the Global Operations segment. The increase in the North America Truck segment was primarily due to increased spending on projects to meet the OBD requirements, as well as product development expenses related to our low-cab-over-engine vehicle, integration of the Cummins 15L engine and Cummins SCR after-treatment systems into certain Traditional truck models, the development of certain natural gas applications, partially offset by a reduction in lower expenses for 0.2 NOx emissions technology due to our change in strategy and development of military-related trucks. The decrease in the Global Operations segment was primarily due to the impacts of project rationalization of certain engineering programs, partially offset by the consolidation of the NC2 operations.
Interest expense
Interest expense increased by $12 million compared to the prior year, which was primarily the result of the August 2012 borrowing of $1 billion under the Term Loan Credit Facility. For more information, see Note 10, Debt, to the accompanying consolidated financial statements.
Other expense (income), net
Other expense (income), net, was an expense of $43 million in 2012, compared to income of $71 million in 2011. In 2012, the Company, particularly the Global Operations segment, was unfavorably impacted by the fluctuations of foreign exchange rates, primarily due to the weakening of the Brazilian Real against the U.S. Dollar, as compared to being favorably impacted in the prior year. Additionally, the Company recognized costs related to the early redemption of a portion of our Senior Notes, which included charges of $8 million for the early redemption premium and write-off of related discount and debt issuance costs. For more information, see Note 10, Debt, to the accompanying consolidated financial statements. Also in 2011, other income, net included a $10 million benefit relating to the extinguishment of a financing liability for equipment within our North America Truck segment.
Equity in loss of non-consolidated affiliates
Equity in loss of non-consolidated affiliates decreased by $42 million, primarily due to our acquisition of Caterpillar's ownership interest in NC2 in September 2011. NC2 is now included in our consolidated results in the Global Operations segment. For more information, see Note 9, Investments in Non-consolidated Affiliates, to the accompanying consolidated financial statements.
Income tax benefit (expense)
In 2012, we recognized income tax expense from continuing operations of $1.8 billion, compared to a benefit of $1.4 billion in 2011. In 2012, we recognized income tax expense of $2.0 billion for the increase in our deferred tax valuation allowances on our U.S. deferred tax assets. This was partially offset by income tax benefit of $189 million, which resulted from the release of a significant portion of our income tax valuation allowance on our Canadian deferred tax assets.
In 2011, we recognized an income tax benefit of $1.5 billion related to the release of a significant portion of our deferred tax valuation allowance on our U.S. deferred tax assets, as well as a $42 million tax benefit related to the resolution of audits in various jurisdictions. Prior to the release of a significant portion of our deferred tax valuation allowances, the amounts recorded in income taxes were limited to current state income taxes, alternative minimum taxes net of refundable credits, and other discrete items.

44


We had $1.1 billion of U.S. net operating losses and $200 million of general business credits as of October 31, 2012. For additional information, see Note 12, Income Taxes, to the accompanying consolidated financial statements.
Net income attributable to non-controlling interests
Net income attributable to non-controlling interests is the result of our consolidation of subsidiaries of which we do not own 100%. Substantially all of our net income attributable to non-controlling interests in 2012 and 2011 relates to Ford's non-controlling interest in our BDP subsidiary.
Loss from discontinued operations, net of tax
In 2012, we incurred a loss from discontinued operations of $71 million compared to a loss of $74 million in 2011. The losses from discontinued operations in both periods were from the WCC operations and certain operating results of the Monaco business.
In 2012 in addition to the operating losses from the divested businesses, the loss included $28 million of charges for impairment of certain intangible assets related to WCC. In 2011, the loss also reflects the Company's commitment to a restructuring plan of the WCC and Monaco operations and recognized $10 million of restructuring charges. Additionally, the Company recognized $51 million of impairments of intangible assets, primarily customer relationships and trade names, associated with the WCC asset group. For more information, see Note 2, Discontinued Operations and Note 3. Restructurings and Impairments, to the accompanying consolidated financial statements
Segment Results of Continuing Operations for 2012 as Compared to 2011
We define segment profit (loss) as net income (loss) attributable to Navistar International Corporation excluding income tax benefit (expense). For additional information about segment profit, see Note 16, Segment Reporting, to the accompanying consolidated financial statements. The following sections analyze operating results as they relate to our four segments and do not include intersegment eliminations.
North America Truck Segment
(in millions, except % change)
2012
 
2011
 
Change
 
%
Change
North America Truck segment sales, net
$
8,388

 
$
9,163

 
$
(775
)
 
(8
)%
North America Truck segment profit (loss)
(736
)
 
344

 
(1,080
)
 
N.M.

Segment sales
North America Truck segment net sales decreased $775 million, or 8%, primarily due to decreases in military sales and Class 6 and 7 medium trucks in our Traditional markets, partially offset by the impact of product mix that include increases in sales of our Class 8 heavy and severe service trucks in our Traditional markets. The decrease in military sales is reflective of our 2012 sales related to the upgrade of MRAP vehicles with our rolling chassis solution and retrofit kits, compared to our 2011 sales that included significant orders for MRAP vehicles. Chargeouts from our Traditional market were down 1%, primarily due to a 15% decrease in our Class 6 and 7 medium trucks, partially offset by a 13% increase in our Class 8 severe service trucks and a 5% increase in our Class 8 heavy trucks.
Segment profit (loss)
The North America Truck segment incurred a loss of $736 million in 2012, which was driven by a decrease in military sales, coupled with a shift in military product mix, the impacts of our engine emission strategy that leveraged EGR technologies, as well as increased warranty expenses. Component complexity and related costs associated with meeting the emissions standards has contributed to higher repair costs that have exceeded those that we have historically experienced. Further contributing to the increase in warranty expense and the associated warranty costs per unit has been shifts in product mix to higher-cost engines. The segment recognized significant charges for adjustments to pre-existing warranties of $400 million in 2012. The adjustments to pre-existing warranties were primarily related to unanticipated increases in warranty expense for certain 2010 emission engines. While we continue to improve the design and manufacturing of our engines to reduce the volume and severity of warranty claims, we have continued to experience higher warranty expenses than expected. Included in 2012 warranty expense, was $107 million of charges related to field campaigns we initiated to address issues in products sold. The charges were primarily recognized as adjustments to pre-existing warranties. Included in 2012 warranty expense, the segment recognized net charges of $66 million for losses on extended warranty contracts for our 2010 emissions standard MaxxForce Big-Bore engines, which was comprised of $19 million related to contracts sold in 2012 and $47 million recognized as adjustments to pre-existing warranties.

45


Also contributing to the loss were charges totaling $150 million in 2012 and $110 million in 2011 for: (i) the integration of our engineering operations, (ii) restructuring of our North American manufacturing operations, (iii) non-conformance penalties for certain 13L engine sales, and (iv) the impact of our fourth quarter of 2012 cost-reduction initiative. These charges consisted of:
(in millions, except % change)
2012
 
2011
 
Change
 
%
Change
Engineering integration costs(A)
$
42

 
$
51

 
$
(9
)
 
(18
)%
Voluntary separation program and reduction-in-force(A)
40

 

 
40

 
N.M.

Restructuring of North American manufacturing operations(A)
34

 
59

 
(25
)
 
(42
)%
Non-conformance penalties(B)
34

 

 
34

 
N.M.

Charges incurred by the North America Truck segment
$
150

 
$
110

 
$
40

 
36
 %
_____________________________
(A)
For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
(B)
For more information, see Note 15. Commitments and Contingencies, to the accompanying consolidated financial statements.
Also impacting the comparative results were higher commodity costs, and increases in Engineering and product development costs. Throughout 2012, we experienced increases in the cost for commodities. The impact of commodity hedging in 2012 was immaterial, compared to recognizing a gain of $17 million in 2011.Engineering and product development costs were higher primarily due to product development of our low-cab-over-engine vehicle, integration of the Cummins 15L engine and Cummins SCR after-treatment systems into certain Traditional truck models, and the development of certain natural gas applications, partially offset by a reduction in expenses for the development of military-related trucks and lower expenses in 2012 for 0.2 NOx emissions technology due to our change in engine strategy.
Partially offsetting these factors were the realization of certain benefits from manufacturing cost efficiencies and lower SG&A expenses. The lower SG&A expenses reflect the impacts from cost-reduction initiatives, partially offset by higher provisions for receivables losses and higher advertising and promotional expenses. Additionally, the segment recognized an increased benefit of $45 million from the allocation of intercompany "access fees" to the North America Parts segment, which consists of certain Engineering and product development costs, depreciation expense, and SG&A expenses incurred by the North America Truck segment that are allocated based on a relative percentage of certain sales.
North America Parts Segment
(in millions, except % change)
2012
 
2011
 
Change
 
%
Change
North America Parts segment sales, net
$
2,621

 
$
2,740

 
$
(119
)
 
(4
)%
North America Parts segment profit
343

 
397

 
(54
)
 
(14
)%
Segment sales
North America Parts segment net sales decreased by $119 million, or 4%, primarily due to lower military sales, partially offset by improvements in our commercial markets. Also contributing to the decrease were lower sales from our BDP operations, which decreased 6%, largely due to reduced volumes.
Segment profit
North America Parts segment profit decreased $54 million, largely driven by a $45 million increase in the allocation of intercompany "access fees," which consists of certain Engineering and product development costs, depreciation expense, and SG&A expenses incurred by the North America Truck segment that are allocated based on a relative percentage of certain sales.
Additionally, the segment incurred a charge of $10 million in the second quarter of 2012 for the impairment of certain intangible assets of the parts distribution operations related to the WCC business. Also in 2012, the North America Parts segment recognized restructuring and other related charges of $7 million for cost-reduction actions. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.

46


Global Operations Segment
(in millions, except % change)
2012
 
2011
 
Change
 
%
Change
Global Operations segment sales, net
$
2,210

 
$
2,430

 
$
(220
)
 
(9
)%
Global Operations segment profit (loss)
(168
)
 
72

 
(240
)
 
N.M.

Segment sales
Global Operations segment net sales decreased by $220 million, or 9%, primarily due to lower sales volumes in our South America engine operations, reflecting a pre-buy of pre-Euro V emissions standard engines in the prior year and the impact of unfavorable movements in foreign currency exchange rates, and decreases in our truck exports. These were partially offset by the impact of the consolidation of our NC2 truck and parts operations.
Segment profit (loss)
The Global Operations segment incurred a loss of $168 million in 2012, predominantly due our South America and NC2 operations. In 2012, in addition to the decrease in volume related to the 2011 emissions pre-buy referenced above, a portion of our engine volumes transitioned to lower margin contract manufacturing. Also impacting the segment's comparative results were restructuring and related charges, as well as the impact of unfavorable movements in foreign currency exchange rates. In 2012, the segment recognized restructuring and related charges of $12 million for cost-reduction initiatives. For more information on restructuring and related cost-reduction actions, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements. Partially offsetting these factors was lower SG&A expenses and Engineering and product development costs, reflecting impacts from cost-reduction initiatives, and the impacts of project rationalization of certain engineering programs.
Financial Services Segment
(in millions, except % change)
2012
 
2011
 
Change
 
%
Change
Financial Services segment revenues, net
$
259

 
$
291

 
$
(32
)
 
(11
)%
Financial Services segment profit
91

 
129

 
(38
)
 
(29
)%
Segment revenues
Financial Services segment net revenues decreased by $32 million, or 11%, primarily driven by the continued decline in the average retail finance receivable balance and a reduction of intercompany financing fees. The decline in the average retail finance receivable balance is reflective of U.S. retail loan originations, which are now being funded primarily under the GE Operating Agreement. During 2012, the average finance receivable balance was $2.4 billion, compared to $3.1 billion during 2011.
Segment profit
The Financial Services segment profit decreased $38 million, predominantly driven by the lower net financial margin due to the decline in average retail finance receivables balance. Also contributing to the decrease in segment profit was higher SG&A expenses, primarily due to an increase in depreciation expense related to higher average investment in equipment under operating leases, and a higher net provision for loan losses.

47


Supplemental Information
The following tables provide additional information on truck industry retail units, market share data, order units, backlog units, chargeout units, and engine shipments. These tables present key metrics and trends that provide quantitative measures on the performance of the North America Truck and Global Operations segments.
We define our Traditional markets to include U.S. and Canada School bus and Class 6 through 8 medium and heavy trucks. We classify militarized commercial vehicles sold to the U.S. and Canadian militaries as Class 8 severe service trucks within our Traditional markets.
Truck Industry Retail Deliveries
The following table summarizes approximate industry retail deliveries, for our Traditional truck market, categorized by relevant class, according to Wards Communications and R.L. Polk & Co. ("Polk"):
 
 
 
 
 
 
 
2013 vs 2012
 
2012 vs 2011
(in units)
2013
 
2012
 
2011
 
Change  
 
% Change  
 
Change  
 
% Change
Traditional Markets (U.S. and Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
School buses(A)
26,600

 
25,000

 
24,100

 
1,600

 
6
 %
 
900

 
4
%
Class 6 and 7 medium trucks
64,000

 
64,400

 
59,200

 
(400
)
 
(1
)%
 
5,200

 
9
%
Class 8 heavy trucks
162,700

 
187,000

 
139,700

 
(24,300
)
 
(13
)%
 
47,300

 
34
%
Class 8 severe service trucks(B)
48,000

 
43,100

 
37,300

 
4,900

 
11
 %
 
5,800

 
16
%
Total Traditional markets
301,300

 
319,500

 
260,300

 
(18,200
)
 
(6
)%
 
59,200

 
23
%
Combined Class 8 trucks
210,700

 
230,100

 
177,000

 
(19,400
)
 
(8
)%
 
53,100

 
30
%
Navistar Traditional retail deliveries(C)
55,500

 
71,600

 
69,000

 
(16,100
)
 
(22
)%
 
2,600

 
4
%
_________________________
(A)
Beginning in the first quarter of 2013, the Company began using bus registration data from Polk to report U.S. and Canada School bus retail market deliveries. Additionally, the School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag. These changes are reflected in all periods presented.
(B)
Traditional retail deliveries include CAT-branded units sold to Caterpillar under our North America supply agreement.
(C)
Periods presented have been recast to exclude militarized commercial units and units related to discontinued operations.
Truck Retail Delivery Market Share
The following table summarizes our approximate retail delivery market share percentages for the Class 6 through 8 U.S. and Canada truck markets, based on market-wide information from Wards Communications and Polk:
 
2013
 
2012
 
2011
Traditional Markets (U.S. and Canada)
 

 
 

 
 
School buses(A)
37
%
 
41
%
 
45
%
Class 6 and 7 medium trucks(B)
24
%
 
32
%
 
38
%
Class 8 heavy trucks
12
%
 
15
%
 
17
%
Class 8 severe service trucks(C)
22
%
 
29
%
 
31
%
Total Traditional markets
18
%
 
22
%
 
27
%
Combined Class 8 trucks
15
%
 
18
%
 
20
%
_________________________
(A)
Beginning in the first quarter of 2013, the School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag. These changes are reflected in all periods presented.
(B)
Retail delivery market share for 2012 and 2011 were updated to reflect the impact of excluding units related to discontinued operations.
(C)
Retail delivery market share includes CAT-branded units sold to Caterpillar under our North America supply agreement. Also, periods presented have been recast to exclude militarized commercial units.


48


Truck Orders, net
We define orders as written commitments received from customers and dealers during the year to purchase trucks. Net orders represent new orders received during the year less cancellations of orders made during the same year. Orders do not represent guarantees of purchases by customers or dealers and are subject to cancellation. Orders may be either sold orders, which will be built for specific customers, or stock orders, which will generally be built for dealer inventory for eventual sale to customers. These orders may be placed at our assembly plants in the U.S. and Mexico for destinations anywhere in the world and include trucks, buses, and military vehicles. Historically, we have had an increase in net orders for stock inventory from our dealers at the end of the year due to a combination of demand and, from time to time, incentives to the dealers. Increases in stock orders typically translate to higher future chargeouts (discussed below). The following table summarizes our approximate net orders for Traditional units:
 
 
 
 
 
 
 
2013 vs. 2012
 
2012 vs. 2011
(in units)
2013
 
2012
 
2011
 
Change
 
% Change
 
Change
 
% Change
Traditional Markets (U.S. and Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
School buses(A)
10,200

 
11,300

 
8,800

 
(1,100
)
 
(10
)%
 
2,500

 
28
 %
Class 6 and 7 medium trucks(B)
15,300

 
18,300

 
24,300

 
(3,000
)
 
(16
)%
 
(6,000
)
 
(25
)%
Class 8 heavy trucks
24,500

 
22,500

 
29,600

 
2,000

 
9
 %
 
(7,100
)
 
(24
)%
Class 8 severe service trucks(C)
9,000

 
12,400

 
11,600

 
(3,400
)
 
(27
)%
 
800

 
7
 %
Total Traditional markets
59,000

 
64,500

 
74,300

 
(5,500
)
 
(9
)%
 
(9,800
)
 
(13
)%
Combined Class 8 trucks
33,500

 
34,900

 
41,200

 
(1,400
)
 
(4
)%
 
(6,300
)
 
(15
)%
_________________________
(A)
Beginning in the first quarter of 2013, the School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag. These changes are reflected in all periods presented.
(B)
Orders for 2012 and 2011 were recast to exclude units related to discontinued operations.
(C)
Orders include CAT-branded units sold to Caterpillar under our North America supply agreement. Also, periods presented have been recast to exclude militarized commercial units.
Truck Backlogs
We define order backlogs ("backlogs") as orders yet to be built as of the end of the period. Our backlogs do not represent guarantees of purchases by customers or dealers and are subject to cancellation. Although the backlog of unbuilt orders is one of many indicators of market demand, other factors such as changes in production rates, internal and supplier available capacity, new product introductions, and competitive pricing actions may affect point-in-time comparisons. Backlogs exclude units in inventory awaiting additional modifications or delivery to the end customer. The following table summarizes our approximate backlog for Traditional units:
 
 
 
 
 
 
 
2013 vs. 2012
 
2012 vs. 2011
(in units)
2013
 
2012
 
2011
 
Change