10-Q 1 nav2015q3.htm 10-Q 10-Q
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-Q
___________________________________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2015

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

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

Registrant’s telephone number, including area code (331) 332-5000
______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
 
þ
  
Accelerated filer
 
o
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
(Do not check if a smaller reporting company)
  
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  þ
As of August 31, 2015, the number of shares outstanding of the registrant’s common stock was 81,522,206, net of treasury shares.
 
 
 
 
 



NAVISTAR INTERNATIONAL CORPORATION FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I—Financial Information
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 
 
 
 
 


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;
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 ability to finish the “Drive-to-Deliver” turnaround and implement our new strategy focused on establishing a leading market position based on uptime advantage and developing effective leaders at every level, and the results we expect to achieve from the completion of the turnaround and the implementation of our strategy;
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 termination of our Blue Diamond Truck ("BDT") joint venture with Ford Motor Company ("Ford");
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 implementation of our emissions compliance strategy and other product modifications that may be required to meet other federal, state, and foreign regulatory requirements;
liabilities resulting from environmental, health and safety laws and regulations;
our anticipated capital expenditures;
our expectations relating to payments of taxes;
our expectations relating to warranty costs;
our expectations relating to interest expense;
our expectations relating to impairment of goodwill and other assets;
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.

3





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, included within (i) our Annual Report on Form 10-K for the year ended October 31, 2014, which was filed on December 16, 2014, and (ii) our Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2015, which was filed on June 4, 2015, as well as those factors discussed elsewhere in this report. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.
Available Information
We are subject to the reporting and information requirements of the Exchange Act and as a result, are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the 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 Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC. Any materials we file with, or furnish to, the SEC may also be read and/or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

4





PART I—Financial Information
Item 1.
Financial Statements
Navistar International Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions, except per share data)
2015
 
2014
 
2015
 
2014
Sales and revenues
 
 
 
 
 
 
 
Sales of manufactured products, net
$
2,501

 
$
2,806

 
$
7,544

 
$
7,683

Finance revenues
37

 
38

 
108

 
115

Sales and revenues, net
2,538

 
2,844

 
7,652

 
7,798

Costs and expenses
 
 
 
 

 

Costs of products sold
2,172

 
2,417

 
6,577

 
6,899

Restructuring charges
13

 
16

 
22

 
27

Asset impairment charges
7

 
4

 
15

 
173

Selling, general and administrative expenses
220

 
241

 
704

 
717

Engineering and product development costs
71

 
80

 
226

 
253

Interest expense
75

 
78

 
227

 
234

Other income, net
(6
)
 
(11
)
 
(37
)
 
(5
)
Total costs and expenses
2,552

 
2,825

 
7,734

 
8,298

Equity in income of non-consolidated affiliates
3

 
2

 
6

 
5

Income (loss) from continuing operations before income taxes
(11
)
 
21

 
(76
)
 
(495
)
Income tax expense
(12
)
 
(14
)
 
(37
)
 
(25
)
Income (loss) from continuing operations
(23
)
 
7

 
(113
)
 
(520
)
Income from discontinued operations, net of tax
2

 
1

 
2

 
3

Net income (loss)
(21
)
 
8

 
(111
)
 
(517
)
Less: Net income attributable to non-controlling interests
7

 
10

 
23

 
30

Net loss attributable to Navistar International Corporation
$
(28
)
 
$
(2
)
 
$
(134
)
 
$
(547
)
 
 
 
 
 
 
 
 
Amounts attributable to Navistar International Corporation common shareholders:
 
 
 
 
 
 
 
Loss from continuing operations, net of tax
$
(30
)
 
$
(3
)
 
$
(136
)
 
$
(550
)
Income from discontinued operations, net of tax
2

 
1

 
2

 
3

Net loss
$
(28
)
 
$
(2
)
 
$
(134
)
 
$
(547
)
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
(0.37
)
 
$
(0.04
)
 
$
(1.67
)
 
$
(6.77
)
Discontinued operations
0.03

 
0.02

 
0.03

 
0.04

 
$
(0.34
)
 
$
(0.02
)
 
$
(1.64
)
 
$
(6.73
)
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.37
)
 
$
(0.04
)
 
$
(1.67
)
 
$
(6.77
)
Discontinued operations
0.03

 
0.02

 
0.03

 
0.04

 
$
(0.34
)
 
$
(0.02
)
 
$
(1.64
)
 
$
(6.73
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
81.6

 
81.4

 
81.5

 
81.3

Diluted
81.6

 
81.4

 
81.5

 
81.3


See Notes to Condensed Consolidated Financial Statements
5


Navistar International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Loss 
(Unaudited)
(in millions)
Three Months Ended July 31,
 
Nine Months Ended July 31,
2015
 
2014
 
2015
 
2014
Net loss attributable to Navistar International Corporation
$
(28
)
 
$
(2
)
 
$
(134
)
 
$
(547
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(47
)
 
(3
)
 
(133
)
 
(17
)
Defined benefit plans (net of tax of $0, $(3), $(1), $(4), respectively)
33

 
33

 
98

 
83

Total other comprehensive income (loss)
(14
)
 
30

 
(35
)
 
66

Total comprehensive income (loss) attributable to Navistar International Corporation
$
(42
)
 
$
28

 
$
(169
)
 
$
(481
)

See Notes to Condensed Consolidated Financial Statements
6


Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
 
July 31,
2015
 
October 31,
2014
(in millions, except per share data)
 
 
 
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
547

 
$
497

Restricted cash and cash equivalents
200

 
40

Marketable securities
293

 
605

Trade and other receivables, net
430

 
553

Finance receivables, net
1,737

 
1,758

Inventories
1,199

 
1,319

Deferred taxes, net
37

 
55

Other current assets
179

 
186

Total current assets
4,622

 
5,013

Restricted cash
157

 
131

Trade and other receivables, net
14

 
25

Finance receivables, net
213

 
280

Investments in non-consolidated affiliates
71

 
73

Property and equipment (net of accumulated depreciation and amortization of $2,534 and $2,535, respectively)
1,375

 
1,562

Goodwill
38

 
38

Intangible assets (net of accumulated amortization of $115 and $109, respectively)
67

 
90

Deferred taxes, net
126

 
145

Other noncurrent assets
86

 
86

Total assets
$
6,769

 
$
7,443

LIABILITIES and STOCKHOLDERS’ DEFICIT
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
1,090

 
$
1,295

Accounts payable
1,326

 
1,564

Other current liabilities
1,333

 
1,372

Total current liabilities
3,749

 
4,231

Long-term debt
4,196

 
3,929

Postretirement benefits liabilities
2,749

 
2,862

Deferred taxes, net
14

 
14

Other noncurrent liabilities
870

 
1,025

Total liabilities
11,578

 
12,061

Redeemable equity securities
1

 
2

Stockholders’ deficit
 
 
 
Series D convertible junior preference stock
3

 
3

Common stock (86.8 shares issued, and $0.10 par value per share and 220 shares authorized, all at both dates)
9

 
9

Additional paid-in capital
2,497

 
2,500

Accumulated deficit
(4,816
)
 
(4,682
)
Accumulated other comprehensive loss
(2,298
)
 
(2,263
)
Common stock held in treasury, at cost (5.3 and 5.4 shares, respectively)
(212
)
 
(221
)
Total stockholders’ deficit attributable to Navistar International Corporation
(4,817
)
 
(4,654
)
Stockholders’ equity attributable to non-controlling interests
7

 
34

Total stockholders’ deficit
(4,810
)
 
(4,620
)
Total liabilities and stockholders’ deficit
$
6,769

 
$
7,443


See Notes to Condensed Consolidated Financial Statements
7



Navistar International Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended July 31,
(in millions)
2015
 
2014
Cash flows from operating activities
 
 
 
Net loss
$
(111
)
 
$
(517
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
165

 
177

Depreciation of equipment leased to others
56

 
79

Deferred taxes, including change in valuation allowance
(9
)
 
(4
)
Asset impairment charges
15

 
173

Amortization of debt issuance costs and discount
28

 
38

Stock-based compensation
8

 
12

Provision for doubtful accounts, net of recoveries
(6
)
 
12

Equity in income of non-consolidated affiliates, net of dividends
2

 
4

Write-off of debt issuance cost and discount

 
1

Other non-cash operating activities
(28
)
 
(27
)
Changes in other assets and liabilities, exclusive of the effects of businesses disposed
(134
)
 
(292
)
Net cash used in operating activities
(14
)
 
(344
)
Cash flows from investing activities
 
 


Purchases of marketable securities
(515
)
 
(1,210
)
Sales of marketable securities
764

 
1,092

Maturities of marketable securities
63

 
330

Net change in restricted cash and cash equivalents
(192
)
 
(30
)
Capital expenditures
(72
)
 
(57
)
Purchases of equipment leased to others
(58
)
 
(157
)
Proceeds from sales of property and equipment
12

 
40

Proceeds from sales of affiliates
7

 
6

Acquisition of intangibles
(4
)
 

Net cash provided by investing activities
5

 
14

Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt
490

 
82

Principal payments on securitized debt
(247
)
 
(101
)
Net change in secured revolving credit facilities
(9
)
 
92

Proceeds from issuance of non-securitized debt
166

 
603

Principal payments on non-securitized debt
(234
)
 
(617
)
Net increase (decrease) in notes and debt outstanding under revolving credit facilities
(41
)
 
87

Principal payments under financing arrangements and capital lease obligations
(2
)
 
(20
)
Debt issuance costs
(10
)
 
(14
)
Proceeds from financed lease obligations
26

 
44

Proceeds from exercise of stock options
1

 
18

Dividends paid by subsidiaries to non-controlling interest
(27
)
 
(40
)
Other financing activities
(27
)
 

Net cash provided by financing activities
86

 
134

Effect of exchange rate changes on cash and cash equivalents
(27
)
 
(12
)
Increase (decrease) in cash and cash equivalents
50

 
(208
)
Cash and cash equivalents at beginning of the period
497

 
755

Cash and cash equivalents at end of the period
$
547

 
$
547


See Notes to Condensed Consolidated Financial Statements
8


Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Deficit
(Unaudited)
(in millions)
Series D
Convertible
Junior
Preference
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Common
Stock
Held in
Treasury,
at cost
 
Stockholders'
Equity
Attributable
to Non-controlling
Interests
 
Total
Balance as of October 31, 2014
$
3

 
$
9

 
$
2,500

 
$
(4,682
)
 
$
(2,263
)
 
$
(221
)
 
$
34

 
$
(4,620
)
Net income (loss)

 

 

 
(134
)
 

 

 
23

 
(111
)
Total other comprehensive loss

 

 

 

 
(35
)
 

 

 
(35
)
Transfer from redeemable equity securities upon exercise or expiration of stock options

 

 
1

 

 

 

 

 
1

Stock-based compensation

 

 
9

 

 

 

 

 
9

Stock ownership programs

 

 
(9
)
 

 

 
9

 

 

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(27
)
 
(27
)
Acquire remaining ownership interest from non-controlling interest holder

 

 
(4
)
 

 

 

 
(23
)
 
(27
)
Balance as of July 31, 2015
$
3

 
$
9

 
$
2,497

 
$
(4,816
)
 
$
(2,298
)
 
$
(212
)
 
$
7

 
$
(4,810
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of October 31, 2013
$
3

 
$
9

 
$
2,477

 
$
(4,063
)
 
$
(1,824
)
 
$
(251
)
 
$
44

 
$
(3,605
)
Net income (loss)

 

 

 
(547
)
 

 

 
30

 
(517
)
Total other comprehensive income

 

 

 

 
66

 

 

 
66

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

 

 
2

 

 

 

 

 
2

Stock-based compensation

 

 
7

 

 

 

 

 
7

Stock ownership programs

 

 
(9
)
 

 

 
26

 

 
17

Equity component of convertible debt instruments, net of tax expense of $16

 

 
27

 

 

 

 

 
27

Equity component of repurchased convertible debt instruments, net of tax benefit of $3

 

 
(5
)
 

 

 

 

 
(5
)
Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(40
)
 
(40
)
Balance as of July 31, 2014
$
3

 
$
9

 
$
2,499

 
$
(4,610
)
 
$
(1,758
)
 
$
(225
)
 
$
34

 
$
(4,048
)

See Notes to Condensed Consolidated Financial Statements
9


Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Organization and Description of the Business
Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating entities are Navistar, Inc. and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer collectively to NIC and its consolidated subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Parts, Global Operations (collectively called "Manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively called "Financial Services operations"). These segments are discussed in Note 12, Segment Reporting.
Our fiscal year ends on October 31. As such, all references to 2015 and 2014 contained within this Quarterly Report on Form 10-Q relate to the fiscal year, unless otherwise indicated.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our Manufacturing operations, which include majority-owned dealers ("Dealcors"), and our Financial Services operations, including VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts.
Certain reclassifications were made to prior period amounts to conform to the 2015 presentation, which relate to the realignment of our reporting segments that became effective during the first quarter of 2015. For more information, see Note 12, Segment Reporting. In addition, reclassifications were made to present the net change in secured revolving credit facilities as a separate line rather than within proceeds from issuance of securitized debt and principal payments on securitized debt on the Condensed Statements of Cash Flows. This reclassification did not have an impact on our Condensed Statements of Cash Flows.
We prepared the accompanying unaudited consolidated financial statements in accordance with United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for comprehensive annual financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended October 31, 2014, which should be read in conjunction with the disclosures therein. In our opinion, these interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.
Variable Interest Entities
We have an interest in several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our VIEs that we are the primary beneficiary because we have the power to direct the activities of the VIE that most significantly impact its economic performance and we have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. Accordingly, we include in our consolidated financial statements the assets and liabilities and results of operations of those entities, even though we may not own a majority voting interest. The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather they represent claims against the specific assets of these VIEs. Assets of these entities are not readily available to satisfy claims against our general assets.
We are the primary beneficiary of our Blue Diamond Parts ("BDP") joint venture with Ford. As a result, our Consolidated Balance Sheets include assets of $56 million and $57 million and liabilities of $13 million and $5 million as of July 31, 2015 and October 31, 2014, respectively, including $15 million and $11 million of cash and cash equivalents, at the respective dates, which are not readily available to satisfy claims against our general assets. The creditors of BDP do not have recourse to our general credit.



10




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


On May 29, 2015, we acquired Ford's remaining 25% ownership in our Blue Diamond Truck ("BDT") joint venture for $27 million. The acquisition of Ford's remaining ownership of the BDT joint venture did not have a material impact on our consolidated net loss for the three months ended July 31, 2015. Prior to the acquisition of Ford's remaining ownership, we were the primary beneficiary of our BDT joint venture with Ford. As a result, our Consolidated Balance Sheets at October 31, 2014 include assets of $240 million and liabilities of $245 million, including $66 million of cash and cash equivalents, which were not readily available to satisfy claims against our general assets.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets of $1.3 billion and $1.1 billion as of July 31, 2015 and October 31, 2014, respectively, and liabilities of $1.1 billion and $896 million as of July 31, 2015 and October 31, 2014, respectively, all of which are involved in securitizations that are treated as asset-backed debt. In addition, our Consolidated Balance Sheets include secured assets of $207 million and $156 million and corresponding liabilities of $85 million and $54 million as of July 31, 2015 and October 31, 2014, respectively, which are related to other secured transactions that do not qualify for sale accounting treatment, and therefore, are treated as borrowings secured by operating and finance leases. Investors that hold securitization debt have a priority claim on the cash flows generated by their respective securitized assets to the extent that the related VIEs are required to make principal and interest payments. Investors in securitizations of these entities have no recourse to our general credit.
We also have an interest in other VIEs, which we do not consolidate because we are not the primary beneficiary. Our financial support and maximum loss exposure relating to these non-consolidated VIEs are not material to our financial condition, results of operations, or cash flows.
We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability to exercise significant influence over operating and financial policies. Equity in income of non-consolidated affiliates includes our share of the net income of these entities.
Product Warranty Liability
The following table presents accrued product warranty and deferred warranty revenue activity:
 
Nine Months Ended July 31,
(in millions)
2015
 
2014
Balance at beginning of period
$
1,197

 
$
1,349

Costs accrued and revenues deferred
177

 
235

Currency translation adjustment
(7
)
 
(2
)
Adjustments to pre-existing warranties(A)
(38
)
 
65

Payments and revenues recognized
(313
)
 
(391
)
Balance at end of period
1,016

 
1,256

Less: Current portion
466

 
578

Noncurrent accrued product warranty and deferred warranty revenue
$
550

 
$
678

_________________________
(A)
Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior periods. Such adjustments typically occur when claims experience deviates from historic and expected trends. Our warranty liability is generally affected by component failure rates, repair costs, and the timing of failures. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.
Adjustments to pre-existing warranties in the third quarter and nine months ended July 31, 2015 include a benefit of $2 million related to our Workhorse Custom Chassis operations, which are reported in Discontinued Operations in the Consolidated Statements of Operations. In the first quarter of 2015, we recognized a benefit for adjustments to pre-existing warranties of $57 million or a benefit of $0.70 per diluted share. In the first quarter of 2014, we recorded adjustments for changes in estimates of $52 million or charges of $0.64 per diluted share. In the second quarter of 2014, we recorded adjustments for changes in estimates of $42 million, or charges of $0.52 per diluted share. In the third quarter of 2014, we recognized a benefit for adjustments to pre-existing warranties of $29 million, or a benefit of $0.36 per diluted share. The impact of income taxes on the 2015 and 2014 adjustments are not material due to our deferred tax valuation allowances on our U.S. deferred tax assets.
Extended Warranty Programs
The amount of deferred revenue related to extended warranty programs was $419 million and $437 million at July 31, 2015 and October 31, 2014, respectively. Revenue recognized under our extended warranty programs was $40 million and $115 million, in the three and nine months ended July 31, 2015, respectively, and $36 million and $96 million for the three and nine months ended July 31, 2014, respectively.


11




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


Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts, income tax contingency accruals and valuation allowances, product warranty accruals, asbestos and other product liability accruals, asset impairment charges, and litigation-related accruals. Actual results could differ from our estimates.
Concentration Risks
Our financial condition, results of operations, and cash flows are subject to concentration risks related to concentrations of our union employees. As of July 31, 2015, approximately 6,000, or 73%, of our hourly workers and approximately 200, or 3%, of our salaried workers are represented by labor unions and are covered by collective bargaining agreements. Our future operations may be affected by changes in governmental procurement policies, budget considerations, changing national defense requirements, and global, political, regulatory and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to the net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or more frequently, if circumstances change or an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Qualitative factors may be assessed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the qualitative assessment indicates that the carrying amount is more likely than not higher than the fair value, goodwill is tested for impairment based on a two-step test. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The income approach is based on discounted cash flows which are derived from internal forecasts and economic expectations for each respective reporting unit.
An intangible asset determined to have an indefinite useful life is not amortized until its useful life is determined to no longer be indefinite. Indefinite-lived intangible assets are evaluated each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Significant judgment is applied when evaluating if an intangible asset has a finite useful life. In addition, for indefinite-lived intangible assets, significant judgment is applied in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions.
During the third quarter of 2015, the economic downturn in Brazil resulted in the continued decline in actual and forecasted results for the Brazilian engine reporting unit with an indefinite-lived intangible asset, trademark, of $24 million. As a result, we performed an impairment analysis in the third quarter of 2015 utilizing the income approach, based on discounted cash flows, which are derived from internal forecasts and economic expectations. It was determined that the carrying value of the trademark exceeded its fair value. As a result, we determined that the trademark was impaired and recognized an impairment charge of $3 million. The non-cash impairment charges were included in Asset impairment charges in the Company's Consolidated Statements of Operations. The Brazilian engine reporting unit is included in the Global Operations segment.



12




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


During the second quarter of 2014, the economic downturn in Brazil resulted in the continued decline in actual and forecasted results for the Brazilian engine reporting unit with goodwill of $142 million and an indefinite-lived intangible asset, trademark, of $43 million. As a result, we performed an impairment analysis in the second quarter of 2014 utilizing the income approach, based on discounted cash flows, which are derived from internal forecasts and economic expectations. It was determined that the carrying value of the Brazilian engine reporting unit, including goodwill, exceeded its fair value. As a result we compared the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. A decrease in the enterprise value of the reporting unit coupled with appreciation in the value of certain tangible assets, which are not recognized for accounting purposes, resulted in the determination that the entire $142 million of goodwill was impaired. In addition, we determined that the related trademark was impaired and recognized an impairment charge of $7 million. The non-cash impairment charges were included in Asset impairment charges in the Company's Consolidated Statements of Operations. The Brazilian engine reporting unit is included in the Global Operations segment.
Recently Adopted Accounting Standards
In the nine months ended July 31, 2015, the Company has not adopted any new accounting guidance that has had a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. On July 9, 2015, the FASB deferred the effective date of this update to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. Our effective date is November 1, 2018. We are currently evaluating the impact and method of adoption of this ASU on our consolidated financial statements.
2. Restructurings and Impairments
Restructuring charges are recorded based on restructuring plans that have been committed to by management and are, in part, based upon management's best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities.
Restructuring Liability
The following tables summarize the activity in the restructuring liability, which includes amounts related to discontinued operations and excludes pension and other postretirement contractual termination benefits:
(in millions)
Balance at October 31, 2014
 
Additions
 
Payments
 
Adjustments
 
Balance at
July 31, 2015
Employee termination charges
$
8

 
$
17

 
$
(7
)
 
$
(2
)
 
$
16

Lease vacancy
11

 

 
(6
)
 

 
5

Other
1

 
2

 
(2
)
 

 
1

Restructuring liability
$
20

 
$
19

 
$
(15
)
 
$
(2
)
 
$
22

(in millions)
Balance at
October 31, 2013
 
Additions
 
Payments
 
Adjustments
 
Balance at
July 31, 2014
Employee termination charges
$
15

 
$
12

 
$
(12
)
 
$
(2
)
 
$
13

Employee relocation costs

 
1

 
(1
)
 

 

Lease vacancy
18

 
1

 
(6
)
 

 
13

Other
1

 

 
(2
)
 

 
(1
)
Restructuring liability
$
34

 
$
14

 
$
(21
)
 
$
(2
)
 
$
25





13




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


North American Manufacturing Restructuring Activities
We continue to focus on our core North American Truck and Parts businesses. We continue to evaluate our portfolio of assets, with the purpose of 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. The Company is currently evaluating its portfolio of assets to validate their strategic and financial fit. To allow us to increase our focus on our North America core businesses, we are evaluating product lines, businesses, and engineering programs that fall outside of our core businesses. We are using a Return-On-Invested-Capital ("ROIC") methodology, combined with an assessment of the strategic fit to our core businesses, to identify areas that are not performing to our expectations. For those areas, we are evaluating whether to fix, divest, or close. These actions could result in additional restructuring and other related charges in the future, including but not limited to: (i) impairments, (ii) costs for employee and contractor termination and other related benefits, and (iii) charges for pension and other postretirement contractual benefits and curtailments. These charges could be significant.
Chatham restructuring activities
In the third quarter of 2011, the Company committed to close its Chatham, Ontario heavy truck plant, which had been idled since June 2009. Potential additional charges in future periods could range from $0 million to $60 million, primarily related to pension, postretirement costs and termination benefits, which are subject to employee negotiation, acceptance rates and the resolution of disputes related thereto. Based on a ruling received from the Financial Services Tribunal in Ontario, Canada, in the third quarter of 2014, the Company recognized additional charges of $14 million related to the 2011 closure of its Chatham, Ontario plant. The Company appealed this ruling, but it was upheld in a July 3, 2015 decision issued by the Divisional Court of Ontario. On July 23, 2015, the Company filed a notice of motion for leave to appeal to the Court of Appeal for Ontario. The appeal was perfected on August 25, 2015 through an additional filing. See Note 7, Postretirement benefits for further discussion.
Foundry Facilities
In December 2014, we announced the closure of our Indianapolis, Indiana foundry facility and on June 30, 2015, we closed our Indianapolis, Indiana foundry. In addition, on April 30, 2015, we sold our Waukesha, Wisconsin foundry operations. As a result of these actions, the Truck segment recognized charges of $3 million and $28 million in the third quarter and first nine months of 2015, respectively, for the acceleration of depreciation of certain assets related to the foundry facilities. These charges are reported within Costs of products sold in the Company's Consolidated Statements of Operations.
Cost-Reductions and Other Strategic Initiatives
From time to time, we have announced, and we may continue to announce, actions to control spending across the Company with targeted reductions of certain costs. We are focused on continued reductions in discretionary spending, including reductions resulting from efficiencies, and prioritizing or eliminating certain programs or projects.
In the third quarter of 2015, the Company initiated new cost-reduction actions, including a reduction-in-force in the U.S. and Brazil. As a result of these actions, the Company recognized restructuring charges of $13 million in personnel costs for employee termination and related benefits, which will be paid throughout 2015 and 2016.
In the second quarter of 2014, the Company initiated new cost-reduction actions, including an enterprise-wide reduction-in-force. As a result of these actions, the Company recognized restructuring charges of $8 million in personnel costs for employee termination and related benefits, the majority of which was paid during 2014. The Company expects the remaining restructuring charges will be paid throughout 2015.
Asset Impairments
The following table reconciles our impairment charges in our Consolidated Statements of Operations
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions)
2015
 
2014
 
2015
 
2014
Goodwill impairment charge
$

 
$

 
$

 
$
142

Intangible asset impairment charge
3

 

 
3

 
7

Other asset impairment charges related to continuing operations
4

 
4

 
12

 
24

Total asset impairment charges
$
7

 
$
4

 
$
15

 
$
173


14




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


In the third quarter of 2015, the Company recognized impairment charges of $7 million, the majority of which was for certain long-lived assets in our Truck segment and certain intangible assets of our Brazilian engine reporting unit. As a result of the economic downturn in Brazil causing declines in actual and forecasted results, we tested the indefinite-lived intangible asset of our Brazilian engine reporting unit for potential impairment. As a result, we determined that $3 million of trademark asset carrying value was impaired. For more information, see Note 1, Summary of Significant Accounting Policies. In addition, during the third quarter of 2015, the Company concluded it had a triggering event related to certain long-lived assets in the Truck segment. As a result, certain long-lived assets were determined to be impaired, resulting in a charge of $3 million. These charges are recognized in Asset impairment charges in the Company's Consolidated Statements of Operations.
In the first quarter of 2015, the Company concluded it had a triggering event related to certain operating leases. As a result, the Truck segment recorded $7 million of asset impairment charges, which are recognized in Asset impairment charges in the Company's Consolidated Statements of Operations
In the second quarter of 2014, we recognized a total non-cash charge of $149 million for the impairment of certain intangible assets of our Brazilian engine reporting unit. As a result of the economic downturn in Brazil causing declines in actual and forecasted results, we tested the goodwill and indefinite-lived intangible asset of our Brazilian engine reporting unit for potential impairment. As a result, we determined that the entire $142 million balance of goodwill and $7 million of trademarks were impaired. For more information, see Note 1, Summary of Significant Accounting Policies.
In the first quarter of 2014, the Company concluded it had a triggering event related to potential sales of assets requiring assessment of impairment for certain intangible and long-lived assets in the Truck segment. As a result, certain amortizing intangible assets and long-lived assets were determined to be fully impaired, resulting in an impairment charge of $19 million that was recognized in the nine months ended July 31, 2014 in Asset impairment charges in the Company's Consolidated Statements of Operations
3. Finance Receivables
Finance receivables are receivables of our Financial Services operations. Finance receivables generally consist of wholesale notes and accounts, as well as retail notes, finance leases and accounts. Total finance receivables reported on the Consolidated Balance Sheets are net of an allowance for doubtful accounts. Total assets of our Financial Services operations net of intercompany balances are $2.7 billion and $2.6 billion as of July 31, 2015 and October 31, 2014, respectively. Included in total assets of our Financial Services operations are finance receivables of $2.0 billion as of July 31, 2015 and October 31, 2014. We have two portfolio segments of finance receivables based on the type of financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.
Our Finance receivables, net consist of the following:
(in millions)
July 31, 2015
 
October 31, 2014
Retail portfolio
$
606

 
$
726

Wholesale portfolio
1,372

 
1,339

Total finance receivables
1,978

 
2,065

Less: Allowance for doubtful accounts
28

 
27

Total finance receivables, net
1,950

 
2,038

Less: Current portion, net(A)
1,737

 
1,758

Noncurrent portion, net
$
213

 
$
280

_________________________
(A)
The current portion of finance receivables is computed based on contractual maturities. Actual cash collections typically vary from the contractual cash flows because of prepayments, extensions, delinquencies, credit losses, and renewals.






15




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


Securitizations
Our Financial Services operations transfers wholesale notes, retail accounts receivable, retail notes, finance leases, and operating leases through special purpose entities ("SPEs"), which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities. In addition to servicing receivables, our continued involvement in the SPEs may include an economic interest in the transferred receivables and, in some cases, managing exposure to interest rates using interest rate swaps and interest rate caps. There were no transfers of finance receivables that qualified for sale accounting treatment as of July 31, 2015 and October 31, 2014, and as a result, the transferred finance receivables are included in our Consolidated Balance Sheets and the related interest earned is included in Finance revenues.
We transfer eligible finance receivables into retail note owner trusts or wholesale note owner trusts in order to issue asset-backed securities. These trusts are VIEs of which we are determined to be the primary beneficiary and, therefore, the assets and liabilities of the trusts are included in our Consolidated Balance Sheets. The outstanding balance of finance receivables transferred into these VIEs was $1.0 billion and $996 million as of July 31, 2015 and October 31, 2014, respectively. Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $129 million and $93 million as of July 31, 2015 and October 31, 2014, respectively. For more information on assets and liabilities of consolidated VIEs and other securitizations accounted for as secured borrowings by our Financial Services segment, see Note 1, Summary of Significant Accounting Policies.
Finance Revenues
The following table presents the components of our Finance revenues:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions)
2015
 
2014
 
2015
 
2014
Retail notes and finance leases revenue
$
12

 
$
16

 
$
37

 
$
49

Wholesale notes interest
27

 
22

 
75

 
59

Operating lease revenue
16

 
15

 
46

 
44

Retail and wholesale accounts interest
8

 
7

 
25

 
20

Gross finance revenues
63

 
60

 
183

 
172

Less: Intercompany revenues
(26
)
 
(22
)
 
(75
)
 
(57
)
Finance revenues
$
37

 
$
38

 
$
108

 
$
115


16




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


4. Allowance for Doubtful Accounts
Our two finance receivables portfolio segments, retail and wholesale, each consist of one class of receivable based on: (i) initial measurement attributes of the receivables, and (ii) the assessment and monitoring of risk and performance of the receivables. For more information, see Note 3, Finance Receivables.
The following tables present the activity related to our allowance for doubtful accounts for our retail portfolio segment, wholesale portfolio segment, and trade and other receivables:
 
Three Months Ended July 31, 2015
 
Three Months Ended July 31, 2014
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
25

 
$
3

 
$
30

 
$
58

 
$
22

 
$
2

 
$
38

 
$
62

Provision for doubtful accounts, net of recoveries
2

 

 

 
2

 
3

 

 

 
3

Charge-off of accounts(A)

 

 
(1
)
 
(1
)
 
(2
)
 

 
(3
)
 
(5
)
Other(B)
(2
)
 

 
(3
)
 
(5
)
 
1

 

 
(1
)
 

Allowance for doubtful accounts, at end of period
$
25

 
$
3

 
$
26

 
$
54

 
$
24

 
$
2

 
$
34

 
$
60

 
Nine Months Ended July 31, 2015
 
Nine Months Ended July 31, 2014
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
24

 
$
3

 
$
38

 
$
65

 
$
21

 
$
2

 
$
37

 
$
60

Provision for doubtful accounts, net of recoveries
7

 

 

 
7

 
10

 

 
3

 
13

Charge-off of accounts(A)
(1
)
 

 
(4
)
 
(5
)
 
(7
)
 

 
(5
)
 
(12
)
Other(B)
(5
)
 

 
(8
)
 
(13
)
 

 

 
(1
)
 
(1
)
Allowance for doubtful accounts, at end of period
$
25

 
$
3

 
$
26

 
$
54

 
$
24

 
$
2

 
$
34

 
$
60

________________________
(A)
We repossess sold and leased vehicles on defaulted finance receivables and leases, and place them into Inventories. Losses recognized at the time of repossession and charged against the allowance for doubtful accounts were both less than $1 million, for the three and nine months ended July 31, 2015, as well as for the three and nine months ended July 31, 2014.
(B) Amounts include currency translation.
The accrual of interest income is discontinued on certain impaired finance receivables. Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on non-accrual status. In certain cases, we continue to collect payments on our impaired finance receivables.
The following table presents information regarding impaired finance receivables:
 
July 31, 2015
 
October 31, 2014
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Impaired finance receivables with specific loss reserves
$
21

 
$

 
$
21

 
$
20

 
$

 
$
20

Impaired finance receivables without specific loss reserves

 

 

 
1

 

 
1

Specific loss reserves on impaired finance receivables
10

 

 
10

 
6

 

 
6

Finance receivables on non-accrual status
21

 

 
21

 
21

 

 
21

For the impaired finance receivables in the retail portfolio as of July 31, 2015 and 2014, the average balances of those receivables were $21 million and $15 million during the nine months ended July 31, 2015 and 2014, respectively.

17




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


The Company uses the aging of its receivables as well as other inputs when assessing credit quality. The following table presents the aging analysis for finance receivables:
 
July 31, 2015
 
October 31, 2014
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Current, and up to 30 days past due
$
531

 
$
1,369

 
$
1,900

 
$
643

 
$
1,333

 
$
1,976

30-90 days past due
58

 
2

 
60

 
64

 
2

 
66

Over 90 days past due
17

 
1

 
18

 
19

 
4

 
23

Total finance receivables
$
606

 
$
1,372

 
$
1,978

 
$
726

 
$
1,339

 
$
2,065

5. Inventories
The following table presents the components of Inventories:
(in millions)
July 31,
2015
 
October 31,
2014
Finished products
$
772

 
$
880

Work in process
66

 
50

Raw materials
361

 
389

Total inventories
$
1,199

 
$
1,319

6. Debt
(in millions)
July 31, 2015
 
October 31, 2014
Manufacturing operations
 
 
 
Senior Secured Term Loan Credit Facility, as amended, due 2017, net of unamortized discount of $2 and $3, respectively
$
695

 
$
694

8.25% Senior Notes, due 2021, net of unamortized discount of $18 and $20, respectively
1,182

 
1,180

4.50% Senior Subordinated Convertible Notes, due 2018, net of unamortized discount of $16 and $19, respectively
184

 
181

4.75% Senior Subordinated Convertible Notes, due 2019, net of unamortized discount of $34 and $40, respectively
377

 
371

Debt of majority-owned dealerships
26

 
30

Financing arrangements and capital lease obligations
48

 
54

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

 
225

Promissory Note
3

 
10

Financed lease obligations
129

 
184

Other
19

 
29

Total Manufacturing operations debt
2,888

 
2,958

Less: Current portion
100

 
100

Net long-term Manufacturing operations debt
$
2,788

 
$
2,858

(in millions)
July 31, 2015
 
October 31, 2014
Financial Services operations
 
 
 
Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2018
$
1,135

 
$
914

Bank revolvers, at fixed and variable rates, due dates from 2015 through 2020
1,147

 
1,242

Commercial paper, at variable rates, program matures in 2017
90

 
74

Borrowings secured by operating and finance leases, at various rates, due serially through 2018
26

 
36

Total Financial Services operations debt
2,398

 
2,266

Less: Current portion
990

 
1,195

Net long-term Financial Services operations debt
$
1,408

 
$
1,071


18




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


Manufacturing Operations
3.00% Senior Subordinated Convertible Notes
In October 2009, we completed the sale of $570 million aggregate principal amount of 3.00% senior subordinated convertible notes ("2014 Convertible Notes"), including over-allotment options. The 2014 Convertible Notes were senior subordinated unsecured obligations of the Company.
In connection with the sale of the 2014 Convertible Notes, the Company purchased call options for $125 million. The call options covered 11,337,870 shares of common stock, subject to adjustments, at an exercise price of $50.27. The call options were intended to minimize share dilution associated with the 2014 Convertible Notes. In addition, in connection with the sale of the 2014 Convertible Notes, the Company also entered into separate warrant transactions whereby, the Company sold warrants for $87 million to sell in the aggregate 11,337,870 shares of common stock, subject to adjustments, at an exercise price of $60.14 per share of common stock.
During the second quarter of 2014, the Company used proceeds from the private issuance of $411 million of 4.75% senior subordinated convertible notes due April 2019 ("2019 Convertible Notes"), as well as cash on-hand, to repurchase $404 million of notional amount of the 2014 Convertible Notes. The Company recorded a charge of $11 million related to the repurchase which was recognized in Other income, net. In conjunction with the repurchases of the 2014 Convertible Notes, call options representing 8,026,456 shares expired or were unwound by the Company and warrants representing 6,523,319 shares were unwound by the Company. On October 15, 2014, upon maturity, the 2014 Convertible Notes were paid in full and the purchased call options expired worthless.
During the first quarter of 2015, warrants representing 1,939,376 shares were unwound by the Company, and the remaining 2,875,175 warrants expired worthless on April 10, 2015.
Senior Secured Term Loan Credit Facility
In August 2012, NIC and Navistar, Inc. signed a definitive credit agreement relating to a senior secured, term loan credit facility in an aggregate principal amount of $1 billion (the "Term Loan Credit Facility") and borrowed an aggregate principal amount of $1 billion under the Term Loan Credit Facility. The Term Loan Credit Facility required quarterly principal amortization payments of 0.25% of the aggregate principal amount, with the balance due at maturity.
The Term Loan Credit Facility is secured by a first priority security interest in certain assets of NIC, Navistar, Inc., and fourteen of its direct and indirect subsidiaries, and contains customary provisions for financings of this type, including, without limitation, representations and warranties, affirmative and negative covenants and events of default. Generally, if an event of default occurs and is not cured within any specified grace period, the administrative agent, at the request of (or with the consent of) the lenders holding not less than a majority in principal amount of the outstanding term loans, may declare the term loan to be due and payable immediately.
In April 2013, the Term Loan Credit Facility was amended (the "Amended Term Loan Credit Facility"), to: (i) change the maturity date of all borrowings under the Term Loan Credit Facility to August 17, 2017, (ii) lower the interest on all borrowings under the Term Loan Credit Facility to a rate equal to a base rate plus a spread of 3.50%, or a Eurodollar rate plus a spread of 4.50% with a London Interbank Offered Rate ("LIBOR") floor that was reduced to 1.25%, (iii) provide additional operating flexibility, and (iv) remove certain pledged assets as collateral from the Term Loan Credit Facility.
In August 2015, the Amended Term Loan Credit Facility was refinanced with a new Senior Secured Term Loan Credit Facility (“Senior Secured Term Loan Credit Facility”), for $1.04 billion. Under the Senior Secured Term Loan Credit Facility: (i) the maturity date was extended to August 7, 2020, (ii) interest rate margins were increased to 5.50% for Eurodollar rate loans and 4.50% for base rate loans, (iii) the Eurodollar rate “floor” was reduced to 1.00%, (iv) the permitted receivables financing basket was increased from $25 million to $50 million, (v) certain prepayments of the Amended Term Loan Credit Facility made prior to August 7, 2017 will be made subject to a call premium of 1.00%, (vi) certain definitional provisions, including those related to asset dispositions were modified, and (vii) quarterly principal amortization payments of 0.25% of the aggregate principal amount are required, with the balance due at maturity. As a consequence of the Senior Secured Term Loan Credit Facility refinancing, the maturity date of Navistar, Inc.’s Amended and Restated Asset-Based Credit Facility (as defined below) was extended from May 18, 2017 to May 18, 2018.




19




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


Amended and Restated Asset-Based Credit Facility
In August 2012, Navistar, Inc. entered into an amended and restated asset-based credit agreement in an aggregate principal amount of $175 million (the "Amended and Restated Asset-Based Credit Facility"). The borrowing base of the facility was secured by a first priority security interest in Navistar, Inc.'s aftermarket parts inventory that is stored at certain parts distribution centers, storage facilities and third-party processor or logistics provider locations. In April 2013, the Amended and Restated Asset-Based Credit Facility was amended to include used truck inventory in the borrowing base.
Also in April 2013, the maturity date of the Amended and Restated Asset-Based Credit Facility automatically extended to May 18, 2017, as a result of a modification to the maturity date of our Amended Term Loan Credit Facility. The Amended and Restated Asset-Based Credit Facility contains customary provisions for financings of this type, including, without limitation, representations and warranties, affirmative and negative covenants and events of default. All borrowings under the Amended and Restated Asset-Based Credit Facility accrue interest at a rate equal to a base rate or an adjusted LIBOR rate plus a spread. The spread, which will be based on an availability-based measure, ranges from 175 basis points to 225 basis points for Base Rate borrowings and 275 basis points to 325 basis points for LIBOR borrowings. The initial LIBOR spread is 275 basis points.
On July 3, 2014, the Amended and Restated Asset-Based Credit Facility was further amended to remove used truck inventory from the borrowing base. Additionally, the calculation of availability was revised to include cash collateral posted to support outstanding designated letters of credit, subject to a $40 million cap, and the cash management provisions were amended to reflect intercreditor arrangements with respect to a financing with Navistar Financial Corporation secured by a first priority lien on the used truck inventory. In connection with the removal of used truck inventory from the borrowing base, certain adjustments were made to the covenants to reflect that such assets were no longer included in the borrowing base. The amendment also provides for a 1.00% reduction in the amount of the participation fee with respect to designated letters of credit in the event that all outstanding letters of credit are in excess of $50 million, such reduction applying only to the portion of designated letters of credit in excess of $50 million for all outstanding letters of credit.
On July 15, 2015, the Amended and Restated Asset-Based Credit Facility was further amended to: (i) permit the incurrence of up to $352.5 million of additional term loans and the issuance of up to $200 million of additional senior notes, (ii) increase the permitted receivables financing from $25 million to $50 million, and (iii) modify the cash dominion trigger and certain of the definitional provisions. As a consequence of the Senior Secured Term Loan Credit Facility, the maturity date of the Amended and Restated Asset-Based Credit Facility was extended by one year to May 18, 2018. The amendment had no impact on the aggregate commitment level under the Amended and Restated Asset-Based Credit Facility, which remains at $175 million. As of July 31, 2015 and October 31, 2014, we had no borrowings under the Amended and Restated Asset-Based Credit Facility. The availability under our $175 million Amended and Restated Asset-Based Credit Facility is subject to a $35 million liquidity block, less outstanding standby letters of credit issued under this facility, and is impacted by inventory levels at certain aftermarket parts inventory locations.
Financial Services Operations
Asset-backed Debt
In July 2015, NFC issued $250 million of two-year investor notes secured by assets of the wholesale note owner trust, of which $240 million were sold to initial purchasers. Proceeds will be used, in part, to replace the $250 million of investor notes that mature in September 2015.
In January 2015, the maturity date of the $500 million variable funding notes ("VFN") facility was extended from March 2015 to January 2016.
In November 2014, NFC completed the sale of $250 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $200 million of investor notes that matured in January 2015. Also in November 2014, the wholesale note owner trust was amended to reduce customer concentration restrictions.
Bank Revolvers and Commercial Paper
In January 2015, NFC paid $125 million in cash dividends to Navistar, Inc. Dividends and certain affiliate loans are subject to the restricted payment covenants set forth in the NFC bank credit facility.
Effective December 2014, our Mexican financial services operation entered into a new two-year commercial paper program for up to P$1.8 billion (the equivalent of approximately US $111 million at July 31, 2015). This program replaces the existing program that was to mature in August 2015.

20




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


7. Postretirement Benefits
Defined Benefit Plans
We provide postretirement benefits to a substantial portion of our employees and retirees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, surviving spouses and dependents.
Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. For the three and nine months ended July 31, 2015, we contributed $11 million and $73 million, respectively, and for the three and nine months ended July 31, 2014, we contributed $33 million and $98 million, respectively, to our pension plans to meet regulatory funding requirements. In August 2014, the Highway and Transportation Funding Act of 2014 ("HATFA"), including extension of pension funding interest rate relief, was signed into law. As a result, we lowered our future funding expectations in 2014. We currently anticipate additional contributions of $40 million to our pension plans during the remainder of 2015.
We primarily fund other post-employment benefit ("OPEB") obligations, such as retiree medical, in accordance with a 1993 Settlement Agreement (the "1993 Settlement Agreement"), which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base Trust"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of the Company's then applicable retiree health care and life insurance benefits. Contributions for the nine months ended July 31, 2015 and 2014, as well as anticipated contributions for the remainder of 2015, are not material.
Components of Net Periodic Benefit Expense
Net postretirement benefits expense included in our Consolidated Statements of Operations is comprised of the following:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
Pension Benefits
 
Health and Life
Insurance Benefits
 
Pension Benefits
 
Health and Life
Insurance Benefits
(in millions)
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost for benefits earned during the period
$
3

 
$
3

 
$
2

 
$
2

 
$
9

 
$
9

 
$
5

 
$
4

Interest on obligation
35

 
39

 
17

 
17

 
106

 
118

 
53

 
51

Amortization of cumulative loss
25

 
23

 
10

 
4

 
74

 
70

 
29

 
12

Amortization of prior service benefit

 

 
(1
)
 
(1
)
 

 

 
(3
)
 
(3
)
Contractual termination benefits

 
14

 

 

 
(1
)
 
14

 
(1
)
 

Premiums on pension insurance
3

 

 

 

 
8

 

 

 

Expected return on assets
(48
)
 
(48
)
 
(7
)
 
(8
)
 
(145
)
 
(144
)
 
(22
)
 
(24
)
Net postretirement benefits expense
$
18

 
$
31

 
$
21

 
$
14

 
$
51

 
$
67

 
$
61

 
$
40


Based on a ruling received from the Financial Services Tribunal in Ontario, Canada, in the third quarter of 2014, the Company recognized contractual termination charges of $14 million related to the 2011 closure of its Chatham, Ontario plant. The Company appealed this ruling, but it was upheld in a July 3, 2015 decision issued by the Divisional Court of Ontario. On July 23, 2015, the Company filed a notice of motion for leave to appeal to the Court of Appeal for Ontario. The appeal was perfected on August 25, 2015 through an additional filing. These charges were in addition to the previous curtailment and contractual termination charges recognized in the third quarter of 2011. There was also a remeasurement of the pension plan for hourly employees during the third quarter of 2014. The discount rate used to measure the pension benefit obligation was 3.8% at remeasurement, compared to 4.1% at October 31, 2013. As a result of the plan remeasurement, net actuarial gains of $10 million were recognized as a component of Accumulated other comprehensive income (loss) in the third quarter of 2014. See Note 2, Restructurings and Impairments for further discussion.

Defined Contribution Plans and Other Contractual Arrangements
Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the Company. The Company deposits the matching contribution annually. Many participants covered by the plans receive annual Company contributions to their retirement accounts based on an age-weighted percentage of the participant's eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $7 million and $24 million in the three and nine months ended July 31, 2015, respectively, and $6 million and $21 million for the three and nine months ended July 31, 2014, respectively.

21




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


In accordance with the 1993 Settlement Agreement, an independent Retiree Supplemental Benefit Trust (the "Supplemental Trust") was established. The Supplemental Trust, and the benefits it provides to certain retirees pursuant to a certain Retiree Supplemental Benefit Program under the 1993 Settlement Agreement ("Supplemental Benefit Program"), is not part of the Company's consolidated financial statements.
The Company's contingent profit sharing obligations under a certain Supplemental Benefit Trust Profit Sharing Plan ("Supplemental Benefit Trust Profit Sharing Plan") will continue until certain funding targets defined by the 1993 Settlement Agreement are met. We have recorded no profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits. For more information, see Note 11, Commitments and Contingencies, for a discussion of pending arbitration regarding the Supplemental Benefit Profit Sharing Plan.
8. Income Taxes
We compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense. For all periods presented, U.S. and certain foreign results are excluded from ordinary income due to ordinary losses for which no benefit can be recognized. Ordinary income refers to income (loss) before income tax expense excluding significant unusual or infrequently occurring items. The tax effect of a significant unusual or infrequently occurring item is recorded in the interim period in which it occurs. Items included in income tax expense in the periods in which they occur include the tax effects of material restructurings, impairments, cumulative effect of changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment regarding the ability to realize deferred tax assets in future years.
We have evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. We continue to maintain a valuation allowance on our U.S. deferred tax assets, as well as certain foreign deferred tax assets, that we believe, on a more-likely-than-not basis, will not be realized. For all remaining deferred tax assets, while we believe at July 31, 2015 that it is more likely than not that they will be realized, we believe that it is reasonably possible that additional deferred tax asset valuation allowances could be required in the next twelve months.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of July 31, 2015, the amount of liability for uncertain tax positions was $41 million. The liability at July 31, 2015 has a recorded offsetting tax benefit associated with various issues that total $14 million. If the unrecognized tax benefits are recognized, all would impact our effective tax rate. However, to the extent we continue to maintain a full valuation allowance against certain deferred tax assets, the effect may be in the form of an increase in the deferred tax asset related to our net operating loss carryforward, which would be offset by a full valuation allowance.
We recognize interest and penalties related to uncertain tax positions as part of Income tax expense. For the three and nine months ended July 31, 2015, total interest and penalties related to our uncertain tax positions resulted in an income tax expense of less than $1 million in each period.
We have open tax years back to 2001 with various significant taxing jurisdictions including the U.S., Canada, Mexico, and Brazil. In connection with the examination of tax returns, contingencies may arise that generally result from differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenues or expenses in taxable income, or the sustainability of tax credits to reduce income taxes payable. We believe we have sufficient accruals for our contingent tax liabilities. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns, although actual results may differ. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next twelve months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash flows.

22




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


9. Fair Value Measurements
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, we classify each fair value measurement as follows:
Level 1—based upon quoted prices for identical instruments in active markets,
Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
Level 3—based upon one or more significant unobservable inputs.
The following section describes key inputs and assumptions in our valuation methodologies:
Cash Equivalents and Restricted Cash Equivalents—We classify highly liquid investments, with an original maturity of 90 days or less, including U.S. Treasury bills, federal agency securities, and commercial paper, as cash equivalents. The carrying amounts of cash and cash equivalents and restricted cash approximate fair value because of the short-term maturity and highly liquid nature of these instruments.
Marketable Securities—Our marketable securities portfolios are classified as available-for-sale and primarily include investments in U.S. government securities and commercial paper with an original maturity greater than 90 days. We use quoted prices from active markets to determine fair value.
Derivative Assets and Liabilities—We measure the fair value of derivatives assuming that the unit of account is an individual derivative transaction and that each derivative could be sold or transferred on a stand-alone basis. We classify within Level 2 our derivatives that are traded over-the-counter and valued using internal models based on observable market inputs. In certain cases, market data is not available and we estimate inputs such as in situations where trading in a particular commodity is not active. Measurements based upon these unobservable inputs are classified within Level 3. For more information regarding derivatives, see Note 10, Financial Instruments and Commodity Contracts.
Guarantees—We provide certain guarantees of payments and residual values to specific counterparties. Fair value of these guarantees is based upon internally developed models that utilize current market-based assumptions and historical data. We classify these liabilities within Level 3. For more information regarding guarantees, see Note 11, Commitments and Contingencies.





23




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


The following table presents the financial instruments measured at fair value on a recurring basis:
 
July 31, 2015
 
October 31, 2014
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury bills
$
188

 
$

 
$

 
$
188

 
$
256

 
$

 
$

 
$
256

Other
105

 

 

 
105

 
349

 

 

 
349

Derivative financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts(A)

 
5

 

 
5

 

 

 

 

Interest rate caps(B)

 

 

 

 

 
1

 

 
1

Total assets
$
293

 
$
5

 
$

 
$
298

 
$
605

 
$
1

 
$

 
$
606

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity forward contracts(C)
$

 
$
4

 
$

 
$
4

 
$

 
$
2

 
$

 
$
2

Guarantees

 

 
10

 
10

 

 

 
8

 
8

Total liabilities
$

 
$
4

 
$
10

 
$
14

 
$

 
$
2

 
$
8

 
$
10

_________________________
(A)
The asset value of foreign currency contracts are included in other current assets as of July 31, 2015 in the accompanying Consolidated Balance Sheets.
(B)
The asset value of interest rate caps are included in other noncurrent assets as of October 31, 2014 in the accompanying Consolidated Balance Sheets.
(C)
The liability value of commodity forward contracts are included in other noncurrent liabilities as of July 31, 2015 and October 31, 2014 in the accompanying Consolidated Balance Sheets.
The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy:

Three Months Ended July 31,
(in millions)
2015

2014
Guarantees, at May 1
$
(7
)

$
(6
)
Transfers out of Level 3



Issuances
(4
)


Settlements
1



Guarantees, at July 31
$
(10
)

$
(6
)
Change in unrealized gains on assets and liabilities still held
$


$

 
Nine Months Ended July 31,
(in millions)
2015
 
2014
Guarantees, at November 1
$
(8
)
 
$
(6
)
Transfers out of Level 3

 

Issuances
(4
)
 

Settlements
2

 

Guarantees, at July 31
$
(10
)
 
$
(6
)
Change in unrealized gains on assets and liabilities still held
$

 
$

The following table presents the financial instruments measured at fair value on a nonrecurring basis:
(in millions)
July 31, 2015
 
October 31, 2014
Level 2 financial instruments
 
 
 
Carrying value of impaired finance receivables (A)
$
21

 
$
20

Specific loss reserve
(10
)
 
(6
)
Fair value
$
11

 
$
14

_________________________
(A)
Certain impaired finance receivables are measured at fair value on a nonrecurring basis. An impairment charge is recorded for the amount by which the carrying value of the receivables exceeds the fair value of the underlying collateral, net of remarketing costs. Fair values of the underlying collateral are determined by reference to dealer vehicle value publications adjusted for certain market factors.


24




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


In the second quarter of 2014, for the purpose of impairment evaluation the Company measured the implied fair value of the Company's Brazilian engine reporting unit's goodwill and the fair value of an indefinite-lived intangible asset, a trademark. The Company's Brazilian engine reporting unit's goodwill was determined to be fully impaired and resulted in a non-cash charge of $142 million. In addition, the related trademark, with a carrying value of $43 million was determined to be impaired and a non-cash charge of $7 million was recognized. The impairment charges were included in Asset impairment charges in the Company's Consolidated Statements of Operations. We utilized the income approach to determine the fair value of these Level 3 assets. For more information, see Note 1, Summary of Significant Accounting Policies.
In the first quarter of 2014, the Company concluded it had a triggering event related to potential sales of assets requiring assessment of impairment for certain intangible and long-lived assets in the Truck segment. As a result, certain amortizing intangible assets and long-lived assets with a carrying value of $18 million were determined to be fully impaired, resulting in an impairment charge of $18 million, which was included in Asset impairment charges in the Company's Consolidated Statements of Operations. We utilized the market approach to determine the fair values of these Level 2 assets.
In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to market on a recurring basis. The carrying amounts of Cash and cash equivalents, Restricted cash, and Accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables generally consist of retail and wholesale accounts and retail and wholesale notes. The carrying amounts of Trade and other receivables and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their variable interest rate terms. The fair values of these financial instruments are classified as Level 1. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below.
The fair values of our retail notes are estimated by discounting expected cash flows at estimated current market rates. The fair values of our retail notes are classified as Level 3 financial instruments.
The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. The 6.5% Tax Exempt Bonds, due 2040, are traded, but the trading market is illiquid, and as a result, the Loan Agreement underlying the Tax Exempt Bonds is classified as Level 2. The fair values of our Level 3 debt instruments are generally determined using internally developed valuation techniques such as discounted cash flow modeling. Inputs such as discount rates and credit spreads reflect our estimates of assumptions that market participants would use in pricing the instrument and may be unobservable.

25




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


The following tables present the carrying values and estimated fair values of financial instruments:
 
As of July 31, 2015
 
Estimated Fair Value
 
Carrying Value
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets
 
 
 
 
 
 
 
 
 
Retail notes
$

 
$

 
$
195

 
$
195

 
$
188

Notes receivable