10-K 1 nav10k2015.htm 10-K 10-K
 
 
 
 
 
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, 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
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
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  o    No   þ
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, 2015, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $1.5 billion.
As of November 30, 2015, the number of shares outstanding of the registrant’s common stock was 81,544,909, net of treasury shares.
Documents incorporated by reference: Portions of the Company's proxy statement for the 2016 annual meeting of stockholders to be held on February 10, 2016 are incorporated by reference in Part III.
 
 
 
 
 



NAVISTAR INTERNATIONAL CORPORATION FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
PART I—Financial Information
 
 
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, markets for our products, and financial performance;
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 implement our new strategy focused on establishing a leading market position based on uptime advantage, a customer-centric culture, leading with connected vehicle offerings, providing customers with meaningful innovation and tailored solutions, and developing effective leaders at every level, and the results we expect to achieve from the implementation of our new strategy;
our expectations related to new product launches;
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 expectations and estimates relating to our used truck inventory;
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.

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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 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 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.

4





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 entities are Navistar, Inc. and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer to NIC and its consolidated 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 2015, 2014, and 2013 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, proprietary 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. We design and manufacture proprietary diesel engines for our International branded trucks and military vehicles and IC branded buses.
Parts—We support our International brand commercial and military trucks, IC brand buses, Maxxforce and our proprietary 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.
Financial Services—We provide retail, wholesale, and lease financing of products sold by the Truck and Parts segments, as well as their dealers, within the U.S. and Mexico.
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 “Core” markets). In the United States and Canada, approximately one in four Class 6 through 8 vehicles on the road today is an International truck, with more than a half million trucks on the road. Navistar also produces over a third of all school buses used in North America. Almost half of the 26 million children in North America who ride school buses every day get to school in one of our yellow buses.
Navistar also has one of the largest commercial vehicle parts distributions networks in the United States and a captive finance company. Outside our Core markets in the United States and Canada, International is the leading truck brand in Mexico and much of Latin America. We are also the largest diesel engine company in Brazil, with 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 addition, we export trucks, buses and engines to niche markets around the world.
We continue to take actions that we believe will improve our performance and continue to evaluate additional opportunities to enhance value. Following is a summary of Our 2015 Accomplishments and Our Expectations Going Forward.
Our 2015 Accomplishments
We have made substantial progress on our top priorities:
I.
Launch of products and product features desired by our customers—We successfully launched products and product features that improve our customers' businesses.
We launched the purpose-built propane bus for school bus customers who want an alternative fuel engine designed for the needs of the school bus market.
OnCommand Connection (“OnCommand”), our unique all-makes remote diagnostics system, was tailored for the applications of our bus and truck customers, and is now standard on our vehicles, to achieve more efficient repairs and maintenance, better life-cycle value, and an overall lower cost of ownership. We now have more than 160,000 vehicles in the OnCommand system.

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We introduced the ProStar ES for customers who seek superior fuel efficiency.
We completed the Cummins ISB launch in our Class 6 and 7 medium and Class 8 severe service trucks.
II.
Improve quality and uptime—We continued our relentless focus on improving quality and uptime.
We have made great strides in rebuilding our quality operating system, achieving new levels of first time quality and uptime and a reduction in our warranty spend. In 2013, our warranty expense represented 7.7% of manufacturing revenue and in 2015, it was 3.0%.
We have achieved a significant reduction in dealer dwell time including improvements in dealer claim days and repair time. We expect that the significant growth in the population of OnCommand vehicles in 2015 will also enable an increase in vehicle uptime by supporting quicker repairs.
To test our vehicles and innovative technologies, we acquired new proving grounds in New Carlisle, Indiana, which will be a strategic addition to our product development operations and our mission to deliver customer uptime.
III.
Deliver on our 2015 plan to reduce costs—Since 2012, we have aggressively managed our Selling, general and administrative and Engineering and product development costs ("structural costs") to right-size them and lower our variable costs. We made significant progress in 2015, which we expect will pave the way for Navistar to be profitable and free-cash flow positive in the future:
We completed a competitive benchmarking study focused on material, manufacturing, and structural costs.
We have focused on our procurement and engineering design processes to lower material costs.
We continued to implement cost saving initiatives, including reductions in discretionary spending and employee headcount reductions, resulting in lower structural costs of $114 million in 2015 compared to 2014.
We implemented a product allocation strategy across our plants whereby each facility is primarily focused on a specific platform, allowing for higher levels of manufacturing efficiency than the flexible-factory configuration we have employed for many years.
We reduced non-productive overtime by 43% compared to 2014.
We sold our foundry operations in Waukesha, Wisconsin and closed our foundry in Indianapolis, Indiana.
IV.
Build sales momentum—In our Core markets, we achieved significant volume growth in Class 6 and 7 medium truck, bus, and dealer-led Class 8 heavy trucks. Growth has been fueled by the completion of the rollout of Selective Catalytic Reduction ("SCR") emissions technology, growing customer confidence, and integrating leading technology with our partners. In 2015, this growth in our Core markets was offset by lower sales from our Global Operations segment, and certain non-Core portions of our Trucks segment.
V.
Improvements in non-Core markets—In addition to improvements in our Core markets, we have experienced improvements in the profitability of our non-Core markets, although revenues in those markets were down, overall, in 2015 compared to 2014. Navistar entered into a long-term agreement with General Motors Company ("GM") to develop and assemble conventional Class 4 through 5 commercial vehicles launching in 2018. This relationship is expected to expand Navistar's medium truck product line and leverage our manufacturing capabilities.
VI.
Improvements in Parts business—Our North American Parts profits increased 22% in 2015 compared to 2014, and overall Parts segment profits increased 12% in 2015 compared to 2014 despite a slight decrease in sales resulting from lower sales by our Blue Diamond Parts ("BDP") joint venture with Ford, among other factors.
Our Expectations Going Forward
We believe we are well-positioned to build upon our 2015 accomplishments:
I.
Implement customer-centric strategy—We are taking steps to become the most customer-centric company in the industry with four key strategies:
Lead in Uptime—We will focus on creating value for our customers by delivering high quality vehicles designed to stay on the road and offering real-time vehicle monitoring and industry-leading fast service and repair.
Build Customer Centric Culture—We will know the customer better than anyone else in order to offer products and services that work for their business.
Lead in Connected Vehicles—We will lead with first-to-market features to expand OnCommand and connected vehicle offerings.

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Leverage Open Technology—We will leverage relationships with world-class technology partners to provide our customers with meaningful innovation and tailored solutions.
II.
New Product Launches—The transition to SCR engines is complete and we are in the process of upgrading our entire product line over the next three years. We are developing new trucks and buses to meet the needs of our customers. We expect to launch the new HX Series, the PayStar replacement, in early 2016 for the construction and vocational markets.  Over the next three years, we will continue to update our entire product line including the introduction of our ProStar replacement, the new LT series.
III.
Financial performance—Due to our continual efforts to become more competitive in cost and in the marketplace, we have had strong financial improvement in recent years. To continue on that path, we have already launched customer-centric strategic initiatives and the next phase of our cost alignment actions. In North America, we completed a benchmarking study that demonstrates that even with the progress we have made to improve our cost structure, there are more opportunities for cost-cutting which we will relentlessly pursue. As a result of these actions, we expect to improve our liquidity and further improve our financial performance, be in a position to compete more aggressively, and increase investment in products and strategic initiatives.
IV.
Profitable improvements in market share—We expect the sales momentum that occurred in 2015 will continue with new product offerings, improved quality, competitive pricing, and our customer-centric initiatives. We expect profitable market share improvements in our Core markets.
Our Operating Segments
We operate in four industry segments: Truck, 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.
During November 2014, we announced changes in our leadership team and in our organizational and reporting structures, which we believe will guide us into the future and enable us to accelerate our performance as we finish the turnaround. These changes impacted how our Chief Operating Decision Maker (“CODM”) assesses the performance of our operating segments and makes decisions about resource allocations. As a result, we identified the following changes within our reportable segments:
The export truck and parts operations, formerly in our Global Operations segment, are now included within the results of our Truck and Parts segments, respectively.
Parts required to support the military truck lines, formerly within our Parts segment, are now included within the results of our Truck segment.
All prior period segment information has been updated to conform to the 2015 presentation. Other than the changes noted above, there were no material changes to our reportable segments. The change in reportable segments had no effect on the Company's consolidated financial position, results of operations, or cash flows for the periods presented.
Truck Segment
Our Truck segment manufactures and distributes Class 4 through 8 trucks, buses, and military vehicles under the International and IC brands, along with production of proprietary engines, primarily in the North America markets that include the U.S., Canada, and Mexico. Our Truck segment also includes our truck export business under the International and IC brands as well as products that support the military truck product lines. The proprietary 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. We continue to develop our expansion markets, which includes the exportation of our truck and bus products. The Truck segment is our largest operating segment based on total external sales and revenues.
We compete primarily in our Core markets. The 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 proprietary engines. In 2013, we began offering the Cummins ISX15 engine, as well as the Cummins SCR after-treatment system on certain applications of our proprietary engines, and in 2014, we began offering the Cummins ISB engine in medium duty 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 military vehicles. We also sell International and CAT branded trucks through our agreement with Caterpillar Inc. ("Caterpillar").

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The 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 a components business focused on air and fuel systems. 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. PPT also included foundry operations that manufactured engine components - mainly blocks, heads, and other engine components - until those foundry operations were sold and closed in 2015.
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 745 outlets in the U.S. and Canada and 91 outlets in Mexico, as of October 31, 2015, and our export truck operations, primarily in Latin America. We occasionally acquire and operate dealer locations ("Dealcors") for the purpose of transitioning ownership. As of October 31, 2015, we operated two 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 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 subsidiary of Toyota Motor Corporation ("Toyota")). Major U.S. military vehicle competitors include BAE Systems, General Dynamics Land Systems, and Oshkosh Corporation. 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 truck 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 proprietary 4.8L, 7L, DT, and 9L engines, face competition from Cummins, Isuzu, Hino, Mercedes Benz, and Ford. In our primary truck export market of South America, we compete with many truck manufacturers, including PACCAR, Freightliner, and Mack.
Parts Segment
Our Parts segment supports our brands of International commercial trucks, IC buses, proprietary 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. In addition, our Parts segment includes our parts export business under the International and IC brands. We distribute service parts through the dealer network that supports our trucks and engines. The 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 operated out of 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. 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.
The 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 ("All-Make parts"), which are common across OEM truck manufacturers. 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, including Fleetpride, TruckPro, and National Auto Parts Association ("Napa") Auto Parts. 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.
Also included in the Parts segment is BDP, which manages the sourcing, merchandising, and distribution of certain service parts for North American Ford vehicles. Major competitors for our BDP joint venture include Alliant Power, Jasper Engines & Transmissions, and Delphi Automotive.

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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, IIAA. 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 IIAA operations, the Global Operations segment has engine manufacturing operations in Argentina. 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. 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 a joint venture in China with Anhui Jianghuai Automobile Co ("JAC"), which allows us to further our reach to global markets. The joint venture focuses 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 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.
Financial Services Segment
Our Financial Services segment provides and manages retail, wholesale, and lease financing of products sold by the Truck and Parts segments and their dealers. We also finance wholesale and retail accounts receivable. Substantially all revenues earned by the Financial Services segment are derived from supporting the sales of our vehicles and products. 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. NFC provides wholesale financing for 100% of new truck inventory sold to our dealers and distributors in the U.S. through the customary free interest period offered by Navistar, Inc. At both October 31, 2015 and 2014, NFC retained floor plan financing for approximately 84% of the dealers after any free interest period. This segment is also facilitating financing relationships in other countries to align with the Company's global operations.
The Financial Services segment manages the relationship with Navistar Capital. Through November 30, 2015, Navistar Capital was an alliance with GE Capital Corporation and GE Capital Commercial, Inc. (together, “GE Capital”) pursuant to the terms of an operating agreement entered into in March 2010 (the “Navistar Capital Operating Agreement”). Navistar Capital is our third-party preferred source of retail customer financing for equipment offered by us and our dealers in the U.S. In addition, GE Capital has provided financing to support the sale of our products in Canada for over 25 years (“NavCap Canada”). On December 1, 2015, General Electric Company ("GE") closed the sale of its GE Capital Transportation Finance business in the U.S. and Canada to BMO Financial Group and its wholly-owned subsidiary BMO Harris Bank N.A. (together “BMO”). Navistar Capital and NavCap Canada are a part of this business. We expect the activities of Navistar Capital and NavCap Canada to continue without interruption after the closing of GE’s sale to BMO.
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.

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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 Truck and Global Operations segments. We have continued to rationalize certain engineering and product development programs based on changes in our engine strategy and to renew our emphasis on the Core North American truck and bus markets. For example, we are currently focused on: (i) updating our International brand commercial trucks to improve fuel economy, quality and uptime for our customers (ii) modifying our trucks to accommodate proprietary engines with the Cummins' SCR after-treatment system, (iii) finalizing the integration of certain Cummins engines into our vehicle lineup, and (iv) material cost reduction activities through design improvement. We continue to invest in our own line of diesel engines, incurring research, development, and tooling costs to meet emissions regulatory requirements and to provide engine solutions that 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 costs were $288 million in 2015 compared to $331 million in 2014 and $406 million in 2013.
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.
The following table provides our worldwide backlog of unfilled truck orders as of October 31, 2015 and 2014:
 
Units
 
Value
As of October 31:
 
 
(in billions)
2015
24,000

 
$
2.0

2014
30,000

 
2.2

The decrease in the backlog of unfilled truck orders was primarily due to BDT, as production of Ford vehicles through our joint venture ceased in 2015, and subsequently, we purchased Ford's remaining ownership in the BDT joint venture in May 2015.
Production of our October 31, 2015 backlog is expected to be substantially completed during 2016. The backlog of unfilled orders is one of many indicators of market demand; 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 2015, our employee headcount was impacted by actions taken to control spending across the Company which included targeted reductions of certain costs. In the U.S., we used attrition and an involuntary reduction-in-force to eliminate additional positions to meet our targeted reductions goal. In addition, we offered the majority of our U.S.-based non-represented salaried employees the opportunity to apply for a voluntary separation program ("VSP") in October 2015, which will impact our employee headcount in 2016. In addition to these actions in the U.S., our Brazilian operations utilized an involuntary reduction-in-force to eliminate certain positions. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
In 2015, we sold our foundry operations in Waukesha, Wisconsin and closed our foundry in Indianapolis, Indiana. In 2014, we sold the E-Z Pack and Continental Mixer businesses, and consolidated our engine manufacturing footprint, moving engine production in Huntsville, Alabama to Melrose Park, Illinois. In 2013, we sold the Workhorse Custom Chassis ("WCC"), Bison Coach trailer manufacturing ("Bison Coach") and Monaco recreational vehicle ("Monaco") businesses. For more information, see Note 2, Discontinued Operations and Other Divestitures, and Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
In 2013, we utilized an involuntary reduction-in-force to eliminate certain positions in the U.S. and Brazil. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.

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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,  
 
2015
 
2014
 
2013
Employees worldwide:
 
 
 
 
 
Total active employees
13,200

 
14,600

 
15,300

Total inactive employees(A)
1,200

 
1,200

 
1,700

Total employees worldwide
14,400

 
15,800

 
17,000

Total active union employees:
 
 
 
 
 
Total UAW
2,800

 
2,700

 
2,300

Total other unions
2,800

 
3,500

 
3,100

__________________ 
(A)
Employees are considered inactive in certain situations including disability leave, leave of absence, layoffs, and work stoppages. Included within inactive employees are approximately 200 employees, 300 employees, and 500 employees as of October 31, 2015, 2014, and 2013, respectively, represented by the National Automobile, Aerospace and Agricultural Implement Workers of Canada ("CAW") at our Chatham, Ontario heavy truck plant, which was closed in 2011 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.
On February 9, 2015, our UAW represented employees ratified a new four year labor agreement that replaced the prior contract that expired October 1, 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 clear 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 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. Some parts and manufactured components 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.
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 cost fluctuations 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 oxides of nitrogen ("NOx") and have reached the last phase-in period effective with engine model year 2010. Meeting these new emissions standards resulted in a significant increase in the cost of our products.

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In 2010, the initial phase-in of onboard diagnostic ("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 U.S. Environmental Protection Agency (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. As the engine is one of a truck's primary sources of noise, we invest a great deal of effort 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 fossil fuels. The EPA and NHTSA issued final rules for greenhouse gas ("GHG") emissions and fuel economy on September 15, 2011. These began 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. Canada adopted its version of fuel economy and GHG emission regulations in February 2013. The Company is complying with these rules through use of existing technologies and implementation of emerging technologies as they become available. Several of the Company's vehicles were certified early for the 2013 model year and the majority of our remaining vehicles and all engines were certified in 2014.
EPA and NHTSA issued a proposed rule for the next phase of federal GHG emission and fuel economy regulations on July 13, 2015. This proposed rule contains more stringent emissions levels for engines and vehicles, adds regulation of trailers and was proposed to take initial effect in model year 2021 with three stages of standards culminating in model year 2027. The Company filed comments to the proposed rule on October 1, 2015. The Company, and the heavy duty vehicle industry as a whole, have raised significant concerns in their comments to the proposed rule. These concerns relate to the stringency and timing of the proposed rules, as well as other aspects of the proposed rule. Discussions continue among the relevant agencies, manufacturers (including the Company), and other stakeholders. A final rule is not expected until calendar year 2016.
Canada’s regulations are substantially aligned with U.S. fuel economy and GHG emission regulations. California has also adopted GHG emission rules for heavy duty vehicles and an optional lower emission standard for NOx in California. California has also requested that the EPA adopt lower NOx standards and stated that it intends to begin developing its own lower NOx rule in 2017. We expect that heavy-duty vehicle and engine fuel economy and GHG 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.
In October 2015, the EPA issued a final rule lowering the national ambient air quality standard for ozone to 70 parts per billion ("ppb"), which could lead in the future to lower permissible emission levels for NOx and volatile organic compounds, as ozone precursors.
Our facilities may be subject to regulation related to climate change, and climate change itself may have some impact on the Company's operations.  Climate change regulation of power sources may also have some impact on the Company’s operations. EPA adopted its Clean Power Plan ("CPP") in late 2014 which sets certain goals for carbon emissions from stationary power plants. Under the CPP, the States are to formulate plans beginning in 2016 to meet the CPP goals by a deadline of 2030. The impact of climate change, regulations to address climate change generally, and the CPP specifically, is currently uncertain and the Company cannot predict the nature and scope of such impact.

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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, 2015.
Name
 
Age
 
Position with the Company
 
 
 
 
 
Troy A. Clarke
 
60
 
President and Chief Executive Officer and Director
Walter G. Borst
 
53
 
Executive Vice President and Chief Financial Officer
William R. Kozek
 
53
 
President, Truck and Parts
Persio V. Lisboa
 
50
 
President, Operations
William V. McMenamin
 
56
 
President, Financial Services and Treasurer
Steven K. Covey
 
64
 
Senior Vice President and General Counsel
Samara A. Strycker
 
43
 
Senior Vice President and Corporate Controller
Curt A. Kramer
 
47
 
Corporate Secretary
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 2012 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 has served as Executive Vice President and Chief Financial Officer of NIC since June 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.
William R. Kozek has served as President, Truck and Parts of Navistar, Inc. since November 2014. Prior to holding this position, Mr. Kozek served as President of North America Truck and Parts of Navistar, Inc. from June 2013 to November 2014. Prior to joining Navistar, Inc., Mr. Kozek held various positions at PACCAR, including as its Vice President and General Manager of its Peterbilt division from January 2012 to June 2013, as Vice President, China from June 2011 to December 2011 and as Vice President and General Manager of PACCAR's Kenworth division from October 2008 to May 2011. Mr. Kozek began his career as an accountant for Peterbilt in 1987, and served in a number of finance roles before moving into operations as a Parts District Manager for the Kenworth division in 1995. He spent the next 16 years at Kenworth moving through a number of key operational roles with increasing responsibility.
Persio V. Lisboa has served as President, Operations of Navistar, Inc. since November 2014. Prior to holding this position, Mr. Lisboa served as the Senior Vice President, Chief Procurement Officer of Navistar, Inc. from December 2012 to November 2014, as Vice President, Purchasing and Logistics and Chief Procurement Officer of Navistar, Inc. from October 2011 to November 2012 and Vice President, Purchasing and Logistics of Navistar, Inc. from August 2008 to October 2011. Prior to these positions, Mr. Lisboa held various management positions within the Company’s North American and South American operations.
William V. McMenamin has served as President, Financial Services and Treasurer of NIC since August 2015.  He has also served as President of NFC since January 2013 and as President, Financial Services and Treasurer of Navistar, Inc. since August 2015. Mr. McMenamin served as Vice President, Chief Financial Officer and Treasurer of NFC from October 2008 to January 2013. Prior to these positions, he served as Vice President of Strategy of NFC from May 2007 to October 2008, Vice President of Credit of NFC from April 2005 to May 2007, and Director of Corporate Finance of Navistar, Inc. from 2001 to 2005. Prior to joining Navistar, Mr. McMenamin held various positions in finance and accounting with a human resources services company, a bank and a national accounting firm.
Steven K. Covey has served as Senior Vice President and General Counsel of NIC since September 2004 and Chief Ethics Officer of NIC from February 2008 to July 2014. 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 of NIC from 1990 to 2000 and Associate General Counsel of Navistar, Inc. from 1992 to 2000.

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Samara A. Strycker has served as Senior Vice President and Corporate Controller of NIC since August 2014. Prior to joining NIC, Ms. Strycker served as Regional Controller, Americas, of General Electric Healthcare ("GE Healthcare") from July 2010 to July 2014 and prior to that position she served as Assistant Controller of GE Healthcare from September 2008 to July 2010.  Prior to joining GE Healthcare, Ms. Strycker was employed at PricewaterhouseCoopers, LLP from 1993 to 2008. Ms. Strycker is a Certified Public Accountant.
Curt A. Kramer has served as Corporate Secretary of NIC since December 2007. Mr. Kramer has also served as Associate General Counsel and Corporate Secretary of Navistar, Inc. since December 2007. Prior to holding these positions, Mr. Kramer served as General Attorney of Navistar, Inc. from April 2007 to December 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.

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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.
We may not realize sufficient acceptance of our products 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 Core markets and regain market share following the transition from our Advanced Exhaust Gas Recirculation ("EGR") only engine technology to an 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, residual values, 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.
We operate in the highly competitive North American truck market.
The North American truck market in which we operate is highly competitive. As a result, we and other manufacturers face competitive pricing and margin pressures that could adversely affect 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 a lower overall cost structure.
Our used truck inventory could adversely affect our financial condition, working capital and market share.
We face intense competition not only with our new and core products, but also with sales of our used truck inventory. During 2015, our gross used truck inventory increased to approximately $390 million from $320 million in 2014, due in part, to an increase in used truck trade-ins in connection with sales of newer models. If the market value of our used trucks decreases, we could incur additional write-downs beyond our existing reserves. If we are unable to sell our used truck inventory in a timely manner and at a reasonable selling price, our working capital and our ability to gain and retain market share may be adversely affected.
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 operating results over the last several years have had an adverse impact on our liquidity position. We believe that our cash on-hand, together with funds generated by our operations, potential borrowings under our debt agreements, and access to the capital markets, 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 2016, 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 certain of our agreements 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 significant interest payments on our indebtedness;

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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 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 senior secured, term loan credit facility in an aggregate principal amount of $1.04 billion (the "Amended Term Loan Credit Facility"), which was refinanced in August 2015 (the "Senior Secured Term Loan Credit Facility") and our amended and restated asset-based credit agreement in an aggregate principal amount of $175 million (the "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 4.50% senior subordinated convertible notes due October 2018 (the "2018 Convertible Notes"), and 4.75% senior subordinated convertible notes due March 2019 (the "2019 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 Senior Secured 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 Senior Secured 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.
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 2013, the major debt-rating agencies downgraded our corporate family credit ratings and in July 2015, Moody’s Corporation downgraded three series of our outstanding debt issuances but left the corporate family credit rating unchanged. In contrast, Standard & Poor's Ratings Services improved our rating outlook from developing to positive in March 2015. 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.

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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. 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.
As a result of the loss of certain personnel in connection with our reductions-in-force and other personnel departures that occurred throughout 2013, 2014 and 2015, we have delivered on our goal of achieving a lean and targeted workforce while reducing and controlling costs. However, failure to retain the qualified personnel that remain, or inability to attract, train and retain qualified additional personnel, could impair our ability to execute our business strategy and could have an adverse effect on our business prospects.
Our parts business may be negatively impacted by our engine strategy.
As a result of our decision to use third party engines in some of our products, we may experience a decline over time in our parts business revenue. In addition, our agreement to supply diesel engines to Ford in North America ended in December 2009. A primary business purpose of BDP is to supply aftermarket parts supporting the diesel engines supplied to Ford. We have experienced declines in BDP’s engine-related parts sales and profitability, and we expect to see further declines as the diesel engines transition out of service in the future.
We have identified a material weakness 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, 2015 because a material weakness existed in our controls designed to validate the proper classification of warranty claims data, including type of warranty coverage and product/component, which is used to determine the warranty accrual and expense. If we are unable to remediate our material weakness 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.
Increased warranty costs may negatively impact our 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. 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. 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. 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 could experience an increase in warranty spend compared to prior periods that could result in additional charges in future periods 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 have an adverse effect on our financial condition, results of operations and cash flows. Throughout 2013, 2014 and 2015, to meet new emissions requirements, including but not limited to OBD and SCR, 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.

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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. Declines in profitability due to changes in volume, market pricing, cost, or the business environment could result in charges that could have an adverse effect on our financial condition and results of operations.
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 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 are exposed to, and may be adversely affected by, interruptions to our computer and information technology systems and sophisticated cyber-attacks.
We rely on our information technology systems and networks in connection with many of our business activities. Some of these networks and systems are managed by third-party service providers and are not under our direct control. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, dealers, suppliers, employees and other sensitive matters. As with most companies, we have experienced cyber-attacks, attempts to breach our systems and other similar incidents, none of which have been material. Any future cyber incidents could, however, materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively

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sensitive information; compromise personally identifiable information regarding customers or employees; and jeopardize the security of our facilities. A cyber incident could be caused by malicious outsiders using sophisticated methods to circumvent firewalls, encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware and other cyber-attacks are increasing in both frequency and sophistication and could create financial liability, subject us to legal or regulatory sanctions or damage our reputation with customers, dealers, suppliers and other stakeholders. We continuously seek to maintain a robust program of information security and controls, but the impact of a material information technology event could have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flows.
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 $1.6 billion and $1.4 billion for pension benefits at October 31, 2015 and 2014, respectively and $1.5 billion for postretirement healthcare benefits at both October 31, 2015 and 2014. In calculating these amounts, we have assumed certain mortality rates, interest rates and growth rates of retiree medical costs. The fair value of invested assets held in our postretirement benefit plans are measured at October 31 each year and are used to compute funded status. Future mortality assumption changes and growth rates of retiree medical costs actually experienced by the postretirement benefit plans, as well as reductions in interest rates and the investment performance of the assets, could have an adverse impact on our under-funded postretirement obligations, financial condition, results of operations and cash flows.
The continued restructuring and rationalization of our business could also 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 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, the Moving Ahead for Progress in the 21st Century Act ("MAP-21 Act") and the Highway and Transportation Funding Act of 2014 ("HATFA") and the Bi-Partisan Budget Act of 2015, will reduce 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 continue 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 implementation of OBD systems requirements as they phase in and manage GHG emission credit balances. The EPA, the U.S. Department of Transportation and the government of Canada have issued final rules on GHG emissions and fuel economy for medium and heavy duty vehicles and engines. The emission standards establish required minimum fuel economy and GHG 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 required EPA certification for vehicles and engines to GHG emissions standards in calendar year 2014 and will be fully implemented in model year 2017. EPA and NHTSA have also proposed a second phase of GHG emissions reductions that are anticipated to apply in three emission standards beginning in model year 2021 and culminating in model year 2027. These reduce emission levels for engines and vehicles. In addition, California has adopted GHG emissions standards for heavy duty vehicles and engines, stated its intention to lower NOx standards for California certified engines and requested EPA to lower NOx emission standards as well. These standards increase costs of development for engines and vehicles and administrative costs arising from implementation of the standards. These regulatory proposals under consideration or those that are proposed in the future may set standards that are difficult to achieve or adversely affect our results of operations due to increased research, development, and warranty costs.
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, 2015, approximately 5,600 of our hourly workers and approximately 300 of our salaried workers were represented by labor unions and were 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

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workforce. On February 9, 2015, our UAW represented employees ratified a new four year labor agreement that replaced the prior contract that expired October 1, 2014. Any strikes, threats of strikes, arbitration or other resistance in connection with the negotiation of new labor agreements, or increases in costs under a newly negotiated labor agreement, 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.
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.
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 of directors, 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 had two representatives nominated for election at our 2014 annual meeting. As of October 31, 2015, 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 16.3 million shares, or 19.9% of our outstanding common stock, (ii) the MHR Group held approximately 16.2 million shares, or 19.9% of our outstanding common stock, and (iii) the Icahn Group, the MHR Group, and three other stockholders, collectively held over 80% 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.
Provisions in our charter and by-laws, 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;
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; and
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.
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.

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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 clients 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 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.

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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 and at properties which received wastes from current or former Company locations 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. These include climate change regulation, such as EPA’s CPP, which could lead to additional state regulations that increase the cost of operations through increased energy costs.
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, continued reductions in discretionary spending, and employee headcount reductions. As a result, our structural costs decreased by $114 million in 2015, compared to the prior year. 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.
GE's sale of its Transportation Finance business may adversely impact the retail and/or wholesale financing for our products in the U.S. and Canada.
Navistar Capital, an alliance with GE Capital, has been our preferred source of retail customer financing for equipment offered by us and our dealers in the U.S. since 2010. In addition, GE Capital has provided wholesale and retail financing to NavCap Canada for over 25 years through NavCap Canada. On December 1, 2015, GE, the parent of GE Capital, closed the sale of GE Capital’s Transportation Finance business in the U.S. and Canada, including Navistar Capital and NavCap Canada, to BMO. If BMO is unable or unwilling to sustain the volume and quality of the loan origination and other financing services that GE Capital provided to us, our ability to sell our products with financing may be adversely affected, and as a result, our business, financial condition, results of operations and cash flows may suffer. There can be no assurance that we would be able to adequately, timely or cost-effectively replace the financing services provided by BMO if such services are unsatisfactory (either by identifying a new third-party partner or by internalizing such services and obtaining the capital needed to fund the financing activities), and any failure to do so could have an adverse effect on our business, financial condition, results of operations, and cash flows.

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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.
We may not achieve all of the expected benefits from our acquisitions, joint ventures, or strategic alliances.
We cannot provide any assurances that our 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. We continue to evaluate opportunities to further restructure our business in an effort to optimize our cost structure, which could include, among other actions, additional 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;
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 ability to use net operating loss ("NOL") carryovers to reduce future tax payments could be negatively impacted if there is a change in our ownership or a failure to generate sufficient taxable income.
As of October 31, 2015, we had $2.6 billion of NOL carryforwards with which to offset our future taxable income for U.S. federal income tax reporting purposes. Presently, there is no annual limitation on our ability to use U.S. federal NOLs to reduce future income taxes. However, we may be subject to substantial annual limitations provided by the IRC if an "ownership change," as defined in Section 382 of the IRC, occurs with respect to our capital stock. Generally, an ownership change occurs if certain persons or groups increase their aggregate ownership by more than 50 percentage points of our total capital stock in a three-year period. If an ownership change occurs, our ability to use domestic NOLs to reduce taxable income is generally limited to an annual amount based on (1) the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate plus (2) built-in gains on certain assets held prior to the ownership change. Although NOLs that exceed the Section 382 limitation in any year continue to be allowed as carryforwards for the remainder of the 20-year carryforward period and can be used to offset taxable income for years within the carryover period subject to the limitation in each year, the use of the remaining NOLs for the loss year will be prohibited if the carryover period for any loss year expires. If we should fail to generate a sufficient level of taxable income prior to the expiration of the NOL carryforward periods, then we will lose the ability to apply the NOLs as offsets to future taxable income. Similar limitations also apply to certain U.S. federal tax credits.  As of October 31, 2015, we had $239 million of U.S. federal tax credits that would be subject to a limitation upon a change in ownership with carryforward periods of 10-20 years.
Item 1B.
Unresolved Staff Comments
None.


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Item 2.
Properties
Our Truck segment operates nine manufacturing and assembly facilities, which contain in the aggregate approximately nine million square-feet of floor space. Of these nine facilities, eight are located in the U.S. and one is located in Mexico. Six facilities are owned and three facilities are subject to leases. Five plants manufacture and assemble trucks, buses, and chassis, three 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 three plants that build engines, two manufacture diesel engines, and one manufactures fuel injectors.
Our Parts segment leases six 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; New Carlisle, Indiana; 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 Indianapolis, Indiana foundry and one of the Huntsville engine plants, which have ceased production activities, as well as the Waukesha foundry which was leased to a third party in April 2015.
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
The Company primarily funds post-employment benefit obligations, other than pension benefits, in accordance with a 1993 Settlement Agreement (the "1993 Settlement Agreement"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of the Company's then applicable health care and life insurance benefits and provides for benefits to certain retirees pursuant to a Retiree Supplemental Benefit Program (the “Supplemental Benefit Program”). 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 Trust 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 Trust 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. In March 2014, the Court denied the Company's Motion to Dismiss and ruled, among other things, that the Company waived its right to compel the Committee to comply with the dispute resolution provisions set forth in the Supplemental Benefit Trust Profit Sharing Plan. In April 2014, the Company appealed the Court's refusal to compel the Committee to comply with the dispute resolution process to the Court of Appeals for the 6th Circuit. The Company also filed a motion with the Court to stay all proceedings pending the appeal. In May 2014, the Court granted the motion to stay all proceedings, including discovery, pending the appeal. In March 2015, the 6th Circuit Court of Appeals remanded the case to the Court with instructions that the Committee’s claims in the Profit Sharing Complaint be arbitrated. In May 2015, the Court ordered that the claims in the Profit Sharing Complaint be arbitrated pursuant to the dispute resolution procedures in the Supplemental Benefit Trust Profit Sharing Plan. In November 2015, the Company and the Committee selected an arbitrator. A status conference is scheduled for January 15, 2016.
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
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, 2015), 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.
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

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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 10b-5 Cases before one judge sitting in the U.S. District Court for the Northern District of Illinois 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, defendants filed a motion to dismiss the Consolidated Amended Complaint.   On July 22, 2014, the Court granted the defendants' Motions to Dismiss, denied the lead plaintiff's Motion to Strike as moot, and gave the lead plaintiff leave to file a second consolidated amended complaint by August 22, 2014.
On August 22, 2014, the plaintiff filed a Second Amended Complaint, which narrowed the claims in two ways. First, the plaintiff abandoned its claims against the majority of the defendants. The now Second Amended Compliant brings claims against only the Company, Dan Ustian, A.J. Cederoth, Jack Allen, and Eric Tech. The plaintiff also shortened the putative class period. In the prior complaint, the class period began on June 9, 2009. In the Second Amended Complaint, it begins on March 10, 2010. Defendants filed their Motion to Dismiss the Second Amended Complaint on September 23, 2014.  In November 2014, the plaintiff voluntarily dismissed Eric Tech as a defendant. On July 10, 2015, the Court issued its Opinion and Order on our Motion to Dismiss the Second Amended Complaint. The Motion to Dismiss was granted in part and denied in part. Specifically, the Court (i) dismissed all of plaintiff’s claims against the Company, Andrew J. Cederoth and Jack Allen and (ii) dismissed all of plaintiffs’ claims against Daniel C. Ustian, the only remaining defendant, except for claims regarding two of Mr. Ustian’s statements. Further, all of the dismissed claims were dismissed with prejudice except for claims based on statements made subsequent to the lead plaintiff’s last purchase of the Company’s stock (the “Post-Purchase Claims”). The Court determined the lead plaintiff lacked standing to assert the Post-Purchase Claims and dismissed those claims without prejudice. At a December 1, 2015 status conference, the parties reported that a settlement in principle had been reached, subject to, among other things, final documentation, confirmatory discovery and Court approval, and the Court filed a minute entry reflecting such report. The Court set a further status conference for February 2, 2016.
In March 2013, James Gould filed a derivative complaint in the U.S. District Court for the Northern District of Illinois 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. On May 3, 2013, the court entered a Stipulation and Order to Stay Action, staying the case pending further order of the court or entry of an order on the motion to dismiss the Consolidated Amended Complaint in the 10b-5 Cases. On July 31, 2014, after the amended complaint was dismissed, the parties filed a status report, and the court entered an order on August 27, 2014 continuing the stay pending a ruling on defendants' motion to dismiss the Second Amended Complaint in the 10b-5 Cases. In November 2015, the existing stay order in this derivative action was further extended through March 22, 2016.
In August 2013, Abbie Griffin filed a derivative complaint in the State of Delaware Court of Chancery, 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, 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. On August 29, 2013, the court entered an order staying the case pending resolution of the defendant's motion to dismiss the Consolidated Amended Complaint in the 10b-5 Cases. On August 5, 2014, the parties filed a status report with the court requesting that the August 2013 stay order remain in place pending a ruling on the motion to dismiss the Second Amended Complaint in the 10b-5 Cases and on November 9, 2014, the court entered an order continuing the stay pending a ruling on defendants’ motion to dismiss the Second Amended Complaint in the 10b-5 Cases. In August 2015, the court further extended the stay of this derivative action through December 3, 2015. In November 2015, the court further extended the stay through March 23, 2016.

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MaxxForce Engine EGR Warranty Litigation
On June 24, 2014, N&C Transportation Ltd. filed a putative class action lawsuit against Navistar International Corporation, Navistar, Inc., Navistar Canada Inc., and Harbour International Trucks in Canada in the Supreme Court of British Columbia (the "N&C Action").  Subsequently, six additional, similar putative class action lawsuits have been filed in Canada (together with the N&C Action, the "Canadian Actions"). A certification hearing is scheduled in the N&C Action starting on June 13, 2016. The plaintiff submitted application materials for the certification motion, and Navistar's responding materials were filed on December 4, 2015. There are no court dates scheduled in any of the other Canadian Actions at this time.
On July 7, 2014, Par 4 Transport, LLC filed a putative class action lawsuit against Navistar, Inc. in the United States District Court for the Northern District of Illinois (the "Par 4 Action"). Subsequently, sixteen additional putative class action lawsuits were filed in various United States district courts, including the Northern District of Illinois, the Eastern District of Wisconsin, the Southern District of Florida, the Middle District of Pennsylvania, the Southern District of Texas, the Western District of Kentucky, the District of Minnesota, and the District of Alabama (together with the Par 4 Action, the "U.S. Actions"). Some of the U.S. Actions name both Navistar International Corporation and Navistar, Inc. The U.S. Actions allege matters substantially similar to the Canadian Actions. More specifically, the Canadian Actions and the U.S. Actions (collectively, the "EGR Class Actions") seek to certify a class of persons or entities in Canada or the United States who purchased and/or leased a ProStar or other Navistar vehicle equipped with a model year 2008-2013 MaxxForce Advanced EGR engine.  In substance, the EGR Class Actions allege that the MaxxForce Advanced EGR engines are defective and that the Company and Navistar, Inc. failed to disclose and correct the alleged defect. The EGR Class Actions assert claims based on theories of contract, breach of warranty, consumer fraud, unfair competition, misrepresentation and negligence. The EGR Class Actions seek relief in the form of monetary damages, punitive damages, declaratory relief, interest, fees, and costs.
On October 3, 2014, Navistar International Corporation and Navistar, Inc. filed a motion before the United States Judicial Panel on Multidistrict Litigation seeking to transfer and consolidate before Judge Joan B. Gottschall of the United States District Court for the Northern District of Illinois all of the then-pending U.S. Actions, as well as certain non-class action MaxxForce Advanced EGR engine lawsuits pending in various federal district courts.
On December 17, 2014, Navistar's motion to consolidate the U.S. Actions and certain other non-class action lawsuits was granted. The United States Judicial Panel on Multidistrict Litigation (the “MDL Panel”) issued an order consolidating all of the U.S. Actions that were pending on the date of Navistar’s motion before Judge Gottschall in the United States District Court for the Northern District of Illinois (the "MDL Action"). The MDL Panel also consolidated into the MDL Action certain non-class action MaxxForce Advanced EGR engine lawsuits pending in the various federal district courts, with the exception of one matter. For putative class action lawsuits filed subsequent to Navistar’s original motion, we continue to request that the MDL Panel similarly transfer and consolidate these U.S. Actions.
At the request of the various law firms representing the plaintiffs in the MDL Action, on March 5, 2015, Judge Gottschall entered an order in the MDL proceeding appointing interim lead counsel and interim liaison counsel for the Plaintiffs. On May 11, 2015, lead counsel for the plaintiffs filed a First Master Consolidated Class Action Complaint ("Consolidated Complaint"). The parties to the MDL Action exchanged initial disclosures on May 29, 2015. The Company answered the Consolidated Complaint on July 13, 2015.
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 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 Clean Air Act Litigation
In February 2012, Navistar, Inc. received a Notice of Violation ("NOV") from the EPA pertaining to certain heavy-duty diesel engines which, according to the EPA, were not completely assembled by Navistar, Inc. until calendar year 2010 and, therefore, were not covered by Navistar, Inc.'s model year 2009 certificates of conformity. The NOV concluded that Navistar, Inc.'s introduction into commerce of each of these engines violated the Federal Clean Air Act.

27





On July 14, 2015, the Department of Justice ("DOJ"), on behalf of the EPA, filed a lawsuit against the Company and Navistar, Inc. in the U.S. District Court for the Northern District of Illinois. Similar to the NOV, the lawsuit alleges that the Company and Navistar, Inc. introduced into commerce approximately 7,749 heavy-duty diesel engines that were not covered by model year 2009 certificates of conformity because those engines were not completely assembled until calendar year 2010, resulting in violations of the Federal Clean Air Act. On July 16, 2015, the DOJ filed an Amended Complaint clarifying the amount of civil penalties being sought. The lawsuit requests injunctive relief and the assessment of civil penalties of up to $37,500 for each violation. On September 14, 2015, the Company and Navistar, Inc. each filed an Answer and Affirmative Defenses to the Amended Complaint. The Company and Navistar, Inc. dispute the allegations in the lawsuit.
CARB Notice of Violation
In April 2013, Navistar, Inc. received a notice of violation and proposed settlement ("Notice") from the 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. In May 2015, Navistar, Inc. and the CARB finalized a settlement resolving the matter for a penalty payment of $0.3 million and the Company's agreement to conduct certain in-use testing.
Brazil Truck Dealer Disputes
In January 2014, IIAA initiated an arbitration proceeding under the International Chamber of Commerce rules seeking payment for goods sold and unpaid, in the amount of R$64 million (approximately US$17 million as of October 31, 2015), including penalties and interest, from a group of affiliated truck dealers in Brazil. The truck dealers are affiliated with each other, but not with us, and are collectively referred to as Navitrucks. In the proceeding, IIAA also seeks a declaration of fault against Navitrucks related to the termination of the truck dealer agreements between IIAA and Navitrucks. Navitrucks responded in part by submitting counterclaims against IIAA seeking the amount of R$128 million (approximately US$33 million as of October 31, 2015) for damages related to alleged unfulfilled promises and injury to Navitrucks’ reputation. In October 2014, Navitrucks amended their counterclaims by increasing the amount of damages. During a preliminary hearing before the arbitral tribunal on March 24, 2015, the parties agreed to submit all of the pending claims between the parties to the exclusive jurisdiction of the arbitral tribunal. Pursuant to the timetable issued in the arbitration proceeding, IIAA presented its complaint in July 2015, Navitrucks filed its answer and counterclaims on August 24, 2015, and IIAA filed its rebuttal and answer to Navitrucks’ counterclaims on October 22, 2015. As of October 31, 2015, the approximate amount of the IIAA claim against Navitrucks is R$99 million (approximately US$26 million as of October 31, 2015), and the approximate amount of the Navitrucks claim against IIAA has been reduced to R$116 million (approximately US$30 million as of October 31, 2015). In addition, Navitrucks has acknowledged that IIAA is entitled to a credit against Navitrucks’ damages claim in the approximate amount of R$55 million (approximately US$14 million as of October 31, 2015).
Two other truck dealers and a truck fleet owner in Brazil have initiated separate adversarial proceedings against IIAA that may have similar legal and factual issues as the Navitrucks claim. These other claims are not material either individually or in the aggregate.
Item 4.
Mine Safety Disclosures
Not applicable.

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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 2015 and 2014:
Year Ended October 31, 2015
 
High
 
Low
 
Year Ended October 31, 2014
 
High
 
    Low    
1st Quarter
 
$
38.05

 
$
28.99

 
1st Quarter
 
$
41.57

 
$
30.80

2nd Quarter
 
31.28

 
27.50

 
2nd Quarter
 
39.45

 
29.08

3rd Quarter
 
30.41

 
16.32

 
3rd Quarter
 
39.41

 
32.45

4th Quarter
 
19.91

 
11.21

 
4th Quarter
 
40.17

 
29.54

Number of Holders
As of November 30, 2015, there were approximately 7,377 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 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 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 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, 2015.
Purchases of Equity Securities
There were no purchases of equity securities by us or affiliates during the three months ended October 31, 2015.

29





Stock Performance
The following graph compares the five-year 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, 2010 in our common stock and in each of the indices shown and assumes reinvestment of all dividends. Data is complete through October 31, 2015. 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,
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
Navistar International Corporation
$
100

 
$
87

 
$
39

 
$
75

 
$
73

 
$
26

S&P 500 Index - Total Returns
100

 
108

 
125

 
158

 
186

 
195

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

 
110

 
107

 
116

 
137

 
101

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 1980-2015. Index Data: Copyright Standard and Poor’s, Inc. Used with permission. All rights reserved.


30





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.
Five-Year Summary of Selected Financial and Statistical Data
 
As of and for the Years Ended October 31,
(in millions, except per share data)
2015
 
2014
 
2013
 
2012(A)
 
2011(B)
RESULTS OF OPERATIONS DATA
 
 
 
 
 
 
 
 
 
Sales and revenues, net
$
10,140

 
$
10,806

 
$
10,775

 
$
12,695

 
$
13,641

Income (loss) from continuing operations before taxes
(103
)
 
(556
)
 
(974
)
 
(1,111
)
 
435

Income tax benefit (expense)
(51
)
 
(26
)
 
171

 
(1,780
)
 
1,417

Income (loss) from continuing operations
(154
)
 
(582
)
 
(803
)
 
(2,891
)
 
1,852

Income (loss) from discontinued operations, net of tax
3

 
3

 
(41
)
 
(71
)
 
(74
)
Net income (loss)
(151
)
 
(579
)
 
(844
)
 
(2,962
)
 
1,778

Less: Net income attributable to non-controlling interests
33

 
40

 
54

 
48

 
55

Net income (loss) attributable to Navistar International Corporation
$
(184
)
 
$
(619
)
 
$
(898
)
 
$
(3,010
)
 
$
1,723

Amounts attributable to Navistar International Corporation common shareholders:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
(187
)
 
$
(622
)
 
$
(857
)
 
$
(2,939
)
 
$
1,797

Income (loss) from discontinued operations, net of tax
3

 
3

 
(41
)
 
(71
)
 
(74
)
Net income (loss)
$
(184
)
 
$
(619
)
 
$
(898
)
 
$
(3,010
)
 
$
1,723

Basic earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
(2.29
)
 
$
(7.64
)
 
$
(10.66
)
 
$
(42.53
)
 
$
24.68

Discontinued operations
0.04

 
0.04

 
(0.51
)
 
(1.03
)
 
(1.02
)
Net income (loss)
$
(2.25
)
 
$
(7.60
)
 
$
(11.17
)
 
$
(43.56
)
 
$
23.66

Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
(2.29
)
 
$
(7.64
)
 
$
(10.66
)
 
$
(42.53
)
 
$
23.61

Discontinued operations
0.04

 
0.04

 
(0.51
)
 
(1.03
)
 
(0.97
)
Net income (loss)
$
(2.25
)
 
$
(7.60
)
 
$
(11.17
)
 
$
(43.56
)
 
$
22.64

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
81.6

 
81.4

 
80.4

 
69.1

 
72.8

Diluted
81.6

 
81.4

 
80.4

 
69.1

 
76.1

BALANCE SHEET DATA
 
 
 
 
 
 
 
 
 

Total assets
$
6,692

 
$
7,443

 
$
8,315

 
$
9,102

 
$
12,291

Long-term debt:(C)
 
 
 
 
 
 
 
 
 
Manufacturing operations
$
3,095

 
$
2,858

 
$
2,561

 
$
2,733

 
$
1,881

Financial services operations
1,093

 
1,071

 
1,361

 
833

 
1,596

Total long-term debt
$
4,188

 
$
3,929

 
$
3,922

 
$
3,566

 
$
3,477

Redeemable equity securities
$

 
$
2

 
$
4

 
$
5

 
$
5

___________________________
(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.


31





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 Overview
Navistar is an international manufacturer of International® brand commercial and military trucks, proprietary brand diesel engines, IC Bus™ ("IC") brand school and commercial buses, as well as a provider of service parts for trucks and diesel engines. Our core business is the North American truck and parts markets, where we principally participate in the U.S. and Canada School bus and Class 6 through 8 medium and heavy trucks (our "Core" markets). We also provide retail, wholesale, and lease financing services for our trucks and parts.
Executive Summary
During 2015, we have made substantial progress on our top priorities, which include launching products and product features desired by our customers, improving quality and uptime, delivering on our plan to reduce costs, building sales momentum, and improving in our non-Core markets and Parts business. We believe our strategy will enable us to continue to improve our sales and market share, reduce costs, and add value for our customers by providing a lower cost of ownership and improved fuel economy.
We also 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. We believe these initiatives, coupled with our continued focus on optimizing our cost structure, will enable us to build on our progress to-date, improve our financial performance, and achieve our long-term financial goals.
We continue to focus on our Core markets. In 2015, the truck industry retail deliveries for our Core markets were up 14% compared to 2014. Our chargeouts of trucks in our Core markets were up 6%, reflecting an 18% increase in Class 6 and 7 medium trucks, a 10% increase in school buses, and a 7% increase in Class 8 severe service trucks, partially offset by a 4% decrease of Class 8 heavy trucks compared to 2014.
2015 Financial Summary
Continuing Operations Results
Continuing Operations Results—Consolidated net sales and revenues were $10.1 billion in 2015, down 6% compared to 2014. The 6% decrease reflects lower sales from our Global Operations and Truck segments.
The Truck segment net sales decreased during 2015 as improved Core truck volumes and increased military sales were more than offset by lower Ford sales in our BDT joint venture, as we acquired Ford's remaining 25% ownership in May 2015, and a decline in our used truck and export truck operations. The decrease in net sales in the Global Operations segment in 2015 is due to lower volumes and unfavorable movements in foreign currency exchange rates in our South American engine and Brazil truck operations.
During 2015, we incurred a loss from continuing operations before income taxes of $103 million compared to a loss from continuing operations of $556 million in 2014. The improvement in our comparative results in 2015 was primarily driven by lower asset impairment charges, lower adjustments to pre-existing warranties, favorable product mix within our Core markets, and lower structural costs of $114 million, partially offset by an increase in our used truck reserves and higher restructuring charges. During 2014, we concluded certain assets were impaired and recognized a non-cash charge of $149 million, primarily related to goodwill, and established a valuation allowance on our deferred tax assets related to our Brazilian operations, which impacted income tax expense by $29 million. In addition, our gross used truck inventory increased to approximately $390 million at October 31, 2015 from $320 million at October 31, 2014 (offset by reserves of $110 million and $40 million, respectively, and including approximately $3 million in our Financial Services segment, at the respective dates) due, in part, to an increase in used truck receipts coupled with a decrease in used truck sales. Throughout 2015, we continued to seek alternative channels to sell our used trucks, including certain export markets which have resulted in a lower price point as compared to our domestic channels.

32





In 2015, consolidated net income from continuing operations attributable to Navistar International Corporation, before manufacturing interest, taxes, depreciation and amortization expenses (“EBITDA”) was $378 million, compared to an EBITDA loss of $21 million for the comparable period in 2014. Included in our EBITDA for 2015 are net charges of $116 million compared to net charges of $327 million in 2014. Excluding these items, adjusted EBITDA was $494 million in 2015 compared to adjusted EBITDA of $306 million in 2014. EBITDA and adjusted EBITDA are not in accordance with, or an alternative for, U.S. GAAP. They exclude certain identified items. For more information regarding this non-GAAP financial information, see Consolidated EBITDA and Adjusted EBITDA.
In 2015, we recognized income tax expense from continuing operations of $51 million, compared to income tax expense of $26 million in the prior year. The difference in the income tax expense was primarily due to geographical mix, certain discrete items, and unfavorable movements in foreign currency exchange rates. Income tax expense in 2014 included charges of $29 million for the establishment of a valuation allowance on our deferred tax assets related to our Brazilian operations, partially offset by a benefit of $16 million resulting from a tax law change in Brazil. In addition, the application of intraperiod tax allocation rules resulted in the recognition of an income tax benefit from continuing operations of $13 million in 2014.
In 2015, after income taxes, the loss from continuing operations attributable to Navistar International Corporation was $187 million, or $2.29 per diluted share, compared to a loss of $622 million, or $7.64 per diluted share, in the prior year.
Liquidity
We ended both 2015 and 2014 with $1.1 billion of consolidated cash, cash equivalents and marketable securities. Consolidated cash, cash equivalents and marketable securities was consistent compared to the prior year but it was affected by net proceeds received for the issuance and repayment of debt, dividends received from non-consolidated affiliates, net proceeds received from finance lease obligations, net proceeds received from the sale of property and equipment and net changes in restricted cash partially offset by a net loss and capital expenditures.
Business Outlook and Key Trends
We continually look for ways to improve the efficiency and performance of our operations, and our focus is on improving our core Truck and Parts businesses. Certain trends have affected our results of operations for 2015 as compared to 2014 and 2013. These trends, as well as the key trends that we expect will impact our future results of operations, are as follows:
Engine Strategy and Emissions Standards Compliance—We believe that our 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 and the 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.
Core Truck Market—The Core truck markets in which we compete are typically cyclical in nature and are strongly influenced by macroeconomic factors such as industrial production, demand for durable goods, construction spending, business investment, oil prices, and consumer confidence and spending, among others. Industry volume is expected to peak in 2015 for this cycle, and we anticipate an industry volume decline in 2016. However, as general economic and industry-specific indicators are positive, we anticipate a relatively smaller decline in 2016 compared to the larger volume declines experienced after prior cycle peaks. In addition, better new truck fuel economy along with rising freight rates and improved trucker profits show the trucking industry remains healthy. We anticipate that Core markets retail deliveries will range between 350,000 units to 380,000 units for 2016.
Used Truck inventory - During 2015, our used truck inventory increased to approximately $390 million from $320 million in 2014 (offset by reserves of $110 million and $40 million, respectively, and including approximately $3 million in our Financial Services segment, at the respective dates) due, in part, to an increase in used truck receipts coupled with a decrease in used truck sales. Throughout 2015, we continued to seek alternative channels to sell our used trucks, including certain export markets which result in a lower price point as compared to our domestic channels.
Worldwide Engine Unit Sales—Our worldwide engine unit sales were 94,600 units in 2015, 138,700 units in 2014, and 185,400 units in 2013. Our worldwide engine unit sales were primarily from our Global Operations segment to external customers in South America and our Truck segment, as engines are integrated into vehicle production. 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

33





products. In North America during 2013, we integrated the Cummins’ SCR after-treatment systems with our proprietary 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 $203 million in 2015, compared to $149 million in 2014 and $541 million in 2013. The 2015 military sales primarily consisted of refurbishment and upgrades of government owned MaxxPro vehicles to “like new” condition, upgrade kits, spare parts, and technical support services. The 2014 military sales primarily consisted of upgrade kits, spare parts and technical support services. The 2013 military sales primarily consisted of upgrading Mine Resistant Ambush Protected ("MRAP") vehicles with our rolling chassis solution and retrofit kits. In 2016, we expect our U.S. military sales to be slightly higher than in 2015 due to a recent new vehicle contract award, additional refurbishment and upgrades of government owned MaxxPro vehicles, and technical support services.
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. We recognized adjustments to pre-existing warranties of $1 million in 2015 compared to adjustments of $55 million in 2014 and $404 million in 2013. In future periods, we could 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 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.
Structural 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, continued reductions in discretionary spending and employee headcount reductions. As a result, our structural costs decreased by $114 million in 2015, compared to 2014, and by $311 million in 2014, compared to 2013.
Core-Business Evaluation—We are focused on improving our Truck and Parts businesses in our Core markets. 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, we sold our Waukesha, Wisconsin foundry operations in the second quarter of 2015, and closed our Indianapolis, Indiana foundry facility in the third quarter of 2015. We divested our interests in the E-Z Pack business in the second quarter of 2014 and the Continental Mixer business in the fourth quarter of 2014. Additionally, in the second quarter of 2014, we announced plans to consolidate our mid-range engine footprint and moved our engine production facility from Huntsville, Alabama to Melrose Park, Illinois. We divested our interests in the two joint ventures with Mahindra and Mahindra Ltd. ("Mahindra") in India, which operated under the names Mahindra Navistar Automotives Ltd. ("MNAL") and Mahindra-Navistar Engines Private Ltd. ("MNEPL") (collectively, the "Mahindra Joint Ventures") and the WCC business in the second quarter of 2013, the Monaco business in the third quarter of 2013, and Bison Coach in the fourth quarter of 2013. We also entered into an agreement to sublease a portion of our manufacturing facility in Cherokee, Alabama in the first quarter of 2013. 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.

34






Global Economy—The global economy, and in particular the U.S. economy, is continuing to recover, and we believe that the related financial markets have mostly stabilized. The economy in Brazil, however, is currently undergoing a period of economic uncertainty and the related financial markets have been unstable. Despite the general economic recovery, the impact of the economic recession and financial turmoil on certain 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 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. The EPA and NHTSA issued final rules for GHG emissions and fuel economy on September 15, 2011. Under these rules, GHG emission certification is required for vehicles and engines beginning 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 has complied with these rules through use of existing technologies and implementation of emerging technologies as they become available. Several of the Company's vehicles were certified early for the 2013 model year and the majority of our remaining vehicles and all engines were certified in 2014. The next phase of federal GHG emission and fuel economy regulations, anticipated for model year 2021, is also under discussion among the relevant agencies, manufacturers, including the Company, and other stakeholders. Canada adopted its version of fuel economy and/or GHG emission regulations in February 2013. These regulations are substantially aligned with U.S. fuel economy and GHG emission regulations. In December 2014, California adopted GHG emission rules for heavy duty vehicles equivalent to EPA rules and an optional lower emission standard for nitrogen oxide ("NOx") in California. California has stated its intention to lower NOx standards for California certified engines and has requested that the EPA lower its standards. We expect that heavy-duty vehicle and engine fuel economy and GHG emissions rules will be under consideration in other 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.


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.
Results of Operations for the year ended October 31, 2015 as compared to the year ended October 31, 2014
(in millions, except per share data and % change)
2015
 
2014
 
Change
 
% Change
Sales and revenues, net
$
10,140

 
$
10,806

 
$
(666
)
 
(6
)%
Costs of products sold
8,670

 
9,534

 
(864
)
 
(9
)%
Restructuring charges
76

 
42

 
34

 
81
 %
Asset impairment charges
30

 
183

 
(153
)
 
(84
)%
Selling, general and administrative expenses
908

 
979

 
(71
)
 
(7
)%
Engineering and product development costs
288

 
331

 
(43
)
 
(13
)%
Interest expense
307

 
314

 
(7
)
 
(2
)%
Other income, net
(30
)
 
(12
)
 
(18
)
 
N.M

Total costs and expenses
10,249

 
11,371

 
(1,122
)
 
(10
)%
Equity in income of non-consolidated affiliates
6

 
9

 
(3
)
 
(33
)%
Loss from continuing operations before income taxes
(103
)
 
(556
)
 
453

 
(81
)%
Income tax benefit (expense)
(51
)
 
(26
)
 
(25
)
 
96
 %
Loss from continuing operations
(154
)
 
(582
)
 
428

 
(74
)%
Less: Net income attributable to non-controlling interests
33

 
40

 
(7
)
 
(18
)%
Loss from continuing operations(A)
(187
)
 
(622
)
 
435

 
(70
)%
Income from discontinued operations, net of tax
3

 
3

 

 
 %
Net loss(A)
$
(184
)
 
$
(619
)
 
$
435

 
(70
)%
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:(A)
 
 
 
 
 
 
 
Continuing operations
$
(2.29
)
 
$
(7.64
)
 
$
5.35

 
(70
)%
Discontinued operations
0.04

 
0.04

 

 
 %
 
$
(2.25
)
 
$
(7.60
)
 
$
5.35

 
(70
)%
Diluted weighted average shares outstanding
81.6

 
81.4

 
0.2

 
 %
_________________________
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)
2015
 
2014
 
Change
 
% Change
Truck
$
7,213

 
$
7,473

 
$
(260
)
 
(3
)%
Parts
2,513

 
2,551

 
(38
)
 
(1
)%
Global Operations
506

 
940

 
(434
)
 
(46
)%
Financial Services
241

 
232

 
9

 
4
 %
Corporate and Eliminations
(333
)
 
(390
)
 
57

 
(15
)%
Total
$
10,140

 
$
10,806

 
$
(666
)
 
(6
)%
In 2015, Truck segment net sales decreased $260 million, or 3%, as improved Core truck volumes and increased military sales were more than offset by a decline in our export truck and used truck operations, and a decline in BDT sales. Chargeouts from our Core markets were up 6%, reflecting improvements in our Class 6 and 7 medium trucks, school buses and Class 8 severe service trucks, partially offset by a decrease in our Class 8 heavy trucks.

36





In 2015, Parts segment net sales decreased $38 million, or 1%, as improvements in our North America markets were more than offset by a decline in BDP due to a decrease of units in operation, decreased export parts sales due to economic conditions in our export markets, and unfavorable movements in foreign currency exchange rates, primarily in Canada. During 2015, sales in the North America commercial parts channel increased by $58 million, or 3%, compared to 2014.
The Global Operations segment net sales decrease of $434 million, or 46%, in 2015, was primarily due to lower volumes and unfavorable movements in foreign currency exchange rates in our South American engine operations due to the economic downturn in Brazil, and decreased revenue of $68 million in our Brazil truck operations, as the prior year included a large government order.
The Financial Services segment net revenues increased $9 million, or 4%, in 2015, primarily due to an increase in the average wholesale notes receivable balances, partially offset by a decline in the average retail notes receivable balances and unfavorable movements in foreign currency exchange rates.
Costs of products sold
In 2015, Costs of products sold decreased by $864 million, reflecting the impact of lower sales in our Global Operations segment and lower Ford sales through our BDT joint venture, partially offset by higher sales in our Core markets and an increase of $45 million in our used truck reserves compared to 2014. In addition, Costs of products sold during 2015 was favorably impacted by a shift in product mix in our Core markets. In 2015, the Company recorded a charge for adjustments to pre-existing warranties of $4 million compared to charges for adjustments to pre-existing warranties of $55 million in 2014. The improvement in adjustments to pre-existing warranties for 2015 reflects quality improvements in recent model years and continued efforts by the Company to reduce overall cost per repair. For more information on warranty, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Restructuring Charges
We recognized restructuring charges of $76 million in 2015 compared to charges of $42 million in the prior year. The charges in 2015 were primarily related to cost reduction actions, including the Company's offering of 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. The charges in 2014 were primarily related to our Indianapolis, Indiana foundry facility and Waukesha, Wisconsin foundry operations, as well as a reduction-in-force in the U.S. Additionally, in the third quarter of 2014, the Company recognized charges of $14 million related to the 2011 closure of its Chatham, Ontario plant, based on a ruling received from the Financial Services Tribunal in Ontario, Canada. The ruling was upheld in a July 2015 decision issued by the Divisional Court of Ontario. The Company is appealing that decision to the Court of Appeal for Ontario. For more information, see Note 3, Restructuring and Impairments, to the accompanying consolidated financial statements.
Asset impairment charges
We recognized asset impairment charges of $30 million in 2015, primarily related to certain operating leases, intangible assets and long-lived assets. In the fourth quarter of 2015, the Company recognized a total non-cash charge of $7 million for the impairment of certain intangible and long-lived assets in the Brazil truck asset group. As a result of the continued operating losses and idled production in the asset group, we tested the indefinite-lived intangible and long-lived assets for potential impairment. As a result, we determined that $4 million of intangible assets and $3 million of certain long-lived assets were impaired. During the third and fourth quarters 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 and $4 million, respectively. In addition, in the third quarter of 2015, the Company recognized impairment charges of $3 million for 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. 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. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
We recognized asset impairment charges of $183 million in 2014. In the second quarter of 2014, we recognized a 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 of our Brazilian engine reporting unit and trademark for potential impairment. As a result, we determined that the entire $142 million balance of goodwill and $7 million of trademark asset carrying value was impaired. For more information, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.

37





In addition, in 2014, the Truck segment recorded asset impairment charges of $33 million, which were primarily related to potential sales of assets requiring assessment of impairment for certain intangible and long-lived assets, reflecting our ongoing evaluation of our portfolio of assets to validate their strategic and financial fit. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Selling, general and administrative expenses
The Selling, general and administrative ("SG&A") expenses decrease of $71 million in 2015 reflects the impact of our cost-reduction initiatives, partially offset by an increase in compensation expense and post-retirement related costs. In 2015, the Company leveraged efficiencies identified through redesigning our organizational structure, including a reduction-in-force in the U.S. and Brazil in 2014.
In the fourth quarter of 2015, 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. As a result of these actions, we expect to realize year-over-year savings. For more information, 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 $43 million in 2015 is primarily due to decreased spend on our SCR-related projects, partially offset by new investments in our Truck segment, particularly Class 8 trucks, vocational trucks and buses, and increased spend on projects focused on 2017 GHG emission regulation integration.
Interest expense
In 2015, interest expense decreased $7 million compared to the prior year, primarily driven by the repurchase of a majority of our 3.00% senior subordinated convertible notes ("2014 Convertible Notes") in April 2014, the repayment of the remainder of our 2014 Convertible Notes in October 2014, and a decrease in debt issuance cost amortization, partially offset by the refinancing of our Amended Term Loan Credit Facility with a new Senior Secured Term Loan Credit Facility in August 2015 and the interest expense incurred in connection with our 4.75% senior subordinated convertible notes due April 2019 ("2019 Convertible Notes"), which were issued in April 2014. Interest expense in 2014 was favorably impacted by the purchase of certain manufacturing equipment that was previously accounted for as a financing arrangement, related to a sale and leaseback transaction.
Other income, net
We recognized Other income of $30 million in 2015 compared to income of $12 million in the prior year. The income in 2015 primarily consists of: (i) $14 million gain related to the settlement of a customer dispute, (ii) $5 million tax credit (iii) gains related to foreign exchange hedges and (iv) gains on asset sales, partially offset by unfavorable movements in foreign currency exchange rates and $14 million of third party fees and unamortized debt issuance costs associated with the refinancing of our Amended Term Loan Credit Facility with a new Senior Secured Term Loan Credit Facility. The income in 2014 is due to the release of an asset retirement obligation associated with the purchase of certain leased manufacturing assets and gains on asset sales, partially offset by $12 million of unamortized debt issuance costs and other charges associated with the repurchase of our 2014 Convertible Notes in April 2014.
Income tax expense
In 2015, we recognized income tax expense from continuing operations of $51 million, compared to income tax expense of $26 million in the prior year. The difference between the income tax expense in 2015 and 2014 is due to geographical mix and certain discrete items. The income tax expense in 2015 also included charges of $7 million related to foreign exchange gains. The income tax expense in 2014 includes charges of $29 million for the establishment of a valuation allowance on our deferred tax assets related to our Brazilian operations, partially offset by an income tax benefit of $16 million resulting from a tax law change in Brazil. In addition, the application of the intraperiod tax allocation rules in 2014 resulted in the recognition of an income tax benefit from continuing operations of $13 million. In both periods the impact of income taxes on U.S. operations was limited to current state income taxes, and other discrete items, due in part to the deferred tax valuation allowances on our U.S. deferred tax assets.

38





At October 31, 2015, we had $2.6 billion of U.S. federal net operating losses and $252 million of federal tax credit carryforwards. 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, which have carryforward periods of up to 20 years. We also have U.S., state and foreign net operating losses that are available to reduce cash payments of U.S., state and foreign taxes in future periods. We maintain valuation allowances on our U.S. and certain foreign deferred tax assets because it is more likely than not that 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 that we do not wholly own. Substantially all of our net income attributable to non-controlling interests in 2015 and 2014 relates to Ford's non-controlling interest in BDP.
Segment Results of Continuing Operations for 2015 as Compared to 2014
We operate in four reporting segments: Truck, 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").
During November 2014, we announced changes in our leadership team and in our organizational and reporting structures, which we believe will guide us into the future and enable us to accelerate our performance as we finish the turnaround. These changes impacted how our Chief Operating Decision Maker (“CODM”) assesses the performance of our operating segments and makes decisions about resource allocations. As a result, we identified the following changes within our reportable segments:
The export truck and parts operations, formerly in our Global Operations segment, are now included within the results of our Truck and Parts segments, respectively.
Parts required to support the military truck lines, formerly within our Parts segment, are now included within the results of our Truck segment.
All prior period segment information has been updated to conform to the 2015 presentation. Other than the changes noted above, there were no material changes to our reportable segments. The change in reportable segments had no effect on the Company's consolidated financial position, results of operations, or cash flows for the periods presented.
We define segment profit (loss) as net income (loss) from continuing operations attributable to NIC excluding income tax benefit (expense). The following sections analyze operating results as they relate to our four segments and do not include intersegment eliminations. For additional information concerning our segments, see Note 16, Segment Reporting, to the accompanying consolidated financial statements.
Truck Segment
(in millions, except % change)
2015
 
2014
 
Change
 
% Change
Truck segment sales, net
$
7,213

 
$
7,473

 
$
(260
)
 
(3
)%
Truck segment loss
(141
)
 
(380
)
 
239

 
(63
)%
Segment sales
In 2015, the Truck segment net sales decreased $260 million, or 3%, as improved Core truck volumes and increased military sales were more than offset by a decline in our export truck and used truck operations, and a decline in Ford sales through our BDT joint venture, as production of Ford vehicles ceased in 2015. Truck chargeouts from our Core markets were up 6%, reflecting an 18% increase in Class 6 and 7 medium trucks, a 10% increase in school buses, and a 7% increase in Class 8 severe service trucks, partially offset by a 4% decrease in Class 8 heavy trucks.

39





Segment loss
In 2015, the Truck segment reduced its segment loss by $239 million, primarily driven by a favorable shift in product mix in our Core markets, partially offset by an increase in our used truck reserves of $45 million, and higher accelerated depreciation charges of $22 million. In 2015, the Truck segment recorded charges for adjustments to pre-existing warranties of $8 million compared to charges for adjustments to pre-existing warranties of $51 million in 2014. The change in adjustments to pre-existing warranties reflects quality improvements in recent model years and continued efforts by the Company to reduce overall cost per repair. During 2015, the segment recorded accelerated depreciation charges of $31 million, primarily for certain assets related to the foundry facilities, compared to accelerated depreciation charges of $9 million in 2014. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
SG&A expenses and Engineering and product development costs continued to decline in 2015. The lower SG&A expenses reflect the impact of our cost-reduction initiatives. Engineering and product development costs decreased by $39 million, primarily due to decreased spending on our SCR-related projects, partially offset by new investments in our Truck segment, particularly Class 8 trucks, vocational trucks and buses, and increased spend on projects focused on 2017 GHG emission regulation integration.
Additionally, in 2015, the segment recorded asset impairment charges of $20 million, compared to $33 million in 2014. The charges in 2015 were for certain long-lived assets and operating leases, while the charges in 2014 were primarily for certain intangible and long-lived assets and reflect our ongoing evaluation of our portfolio of assets to validate their strategic and financial fit. For more information on the other asset impairment charges, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Parts Segment
(in millions, except % change)
2015
 
2014
 
Change
 
% Change
Parts segment sales, net
$
2,513

 
$
2,551

 
$
(38
)
 
(1
)%
Parts segment profit
592

 
528

 
64

 
12
 %
Segment sales
In 2015, the Parts segment net sales decreased $38 million, or 1%, as improvements in our North America markets were more than offset by a decline in BDP due to a decrease of units in operation, decreased export parts sales due to economic conditions in our export markets, and unfavorable movements in foreign currency, primarily in Canada. During 2015, sales in the North America commercial parts channel increased by $58 million, or 3%, compared to the prior year.
Segment profit
In 2015, the Parts segment increased its segment profit by $64 million, or 12%, primarily due to margin improvements in our commercial markets, the impact of our cost-reduction initiatives taken in 2014, and lower intercompany "access fees", partially offset by the decline in BDP. Access fees are allocated to the Parts segment from the Truck segment, primarily for development of new products, and consist of certain engineering and product development costs, depreciation expense, and SG&A. The lower fees in 2015 are due to cost-reduction initiatives in the Truck segment.
Global Operations Segment
(in millions, except % change)
2015
 
2014
 
Change
 
% Change
Global Operations segment sales, net
$
506

 
$
940

 
$
(434
)
 
(46
)%
Global Operations segment loss
(67
)
 
(274
)
 
207

 
(76
)%
Segment sales
In 2015, the Global Operations segment net sales decrease of $434 million was driven by a decrease of $366 million in our South America engine operations, reflecting lower volumes and unfavorable movements in foreign currency exchange rates, as the average conversion rate of the Brazilian Real to the U.S. dollar has weakened by 25% for 2015 compared to 2014. The continued economic downturn in the Brazil economy has contributed to lower engine volumes of 37% in 2015 compared to the prior year. The decrease in 2015 was also attributable to a decrease in revenue of $68 million from our Brazil truck operations, as the prior year included a large government order.

40





Segment loss
In 2015, the Global Operations segment results improved by $207 million over the comparable prior year period primarily due to the non-recurrence of non-cash charges of $149 million for the impairment of the goodwill of our Brazilian engine reporting unit and the related trademark during the second quarter of 2014. As a result of the economic downturn in Brazil causing declines in actual and forecasted results in 2014, we tested the goodwill of our Brazilian engine reporting unit and trademark for potential impairment. As a result, we determined that the entire $142 million balance of goodwill and $7 million of trademark asset carrying value was impaired. These non-recurring charges in 2014 were offset by an increase in restructuring costs of $16 million in 2015 compared to 2014.
Excluding the impact of the prior year impairment and current year restructuring costs increase, the Global Operations segment results improved by $74 million in 2015 over the prior year. The remaining improvements in the segment are primarily due to lower manufacturing and structural costs as a result of our prior year restructuring and cost-reduction efforts, and a $10 million net gain in 2015 related to a settlement of a customer dispute. These improvements are partially offset by the decreased results of our Brazil truck operations, including a $6 million inventory charge related to our efforts to right-size the truck business due to the current economic conditions in Brazil, and unfavorable movements in foreign currency exchange rates.
Financial Services Segment
(in millions, except % change)
2015
 
2014
 
Change
 
% Change
Financial Services segment revenues, net
$
241

 
$
232

 
$
9

 
4
%
Financial Services segment profit
98

 
97

 
1

 
1
%
Segment revenues
In 2015, net revenues in the Financial Services segment increased by $9 million, or 4%, primarily driven by an increase in the average wholesale notes receivable balances and higher revenues from operating leases, partially offset by a decline in the average retail notes receivable balance. The decline in the average retail notes receivable balance is primarily due to the continued liquidation of our U.S. retail portfolio and unfavorable movements in foreign currency in our Mexican retail portfolio.
Segment profit
In 2015, the Financial Services segment profit was comparable to the prior year as an increase in revenue and a decrease in the provision for loan losses were offset by lower interest income from intercompany loans.

41





Results of Operations for the year ended October 31, 2014 as compared to the year ended October 31, 2013
 
 
 
 
 
 
 
%
Change
(in millions, except per share data and % change)
2014
 
2013
 
Change
 
Sales and revenues, net
$
10,806

 
$
10,775

 
$
31

 
 %
Costs of products sold
9,534

 
9,761

 
(227
)
 
(2
)%
Restructuring charges
42

 
25

 
17

 
68
 %
Asset impairment charges
183

 
97

 
86

 
89
 %
Selling, general and administrative expenses
979

 
1,215

 
(236
)
 
(19
)%
Engineering and product development costs
331

 
406

 
(75
)
 
(18
)%
Interest expense
314

 
321

 
(7
)
 
(2
)%
Other income, net
(12
)
 
(65
)
 
53

 
(82
)%
Total costs and expenses
11,371

 
11,760

 
(389
)
 
(3
)%
Equity in income of non-consolidated affiliates
9

 
11

 
(2
)
 
(18
)%
Loss from continuing operations before income taxes
(556
)
 
(974
)
 
418

 
(43
)%
Income tax benefit (expense)
(26
)
 
171

 
(197
)
 
N.M.

Loss from continuing operations
(582
)
 
(803
)
 
221

 
(28
)%
Less: Net income attributable to non-controlling interests
40

 
54

 
(14
)
 
(26
)%
Loss from continuing operations(A)
(622
)
 
(857
)
 
235

 
(27
)%
Income (loss) from discontinued operations, net of tax
3

 
(41
)
 
44

 
N.M.

Net loss(A)
$
(619
)
 
$
(898
)
 
$
279

 
(31
)%
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:(A)
 
 
 
 
 
 
 
Continuing operations
$
(7.64
)
 
$
(10.66
)
 
$
3.02

 
(28
)%
Discontinued operations
0.04

 
(0.51
)
 
0.55

 
N.M.

 
$
(7.60
)
 
$
(11.17
)
 
$
3.57

 
(32
)%
Diluted weighted average shares outstanding
81.4

 
80.4

 
1.0

 
1
 %
_________________________
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:
 
 
 
 
 
 
 
%
Change
(in millions, except % change)
2014
 
2013
 
Change
 
Truck
$
7,473

 
$
7,291

 
$
182

 
2
 %
Parts
2,551

 
2,510

 
41

 
2
 %
Global Operations
940

 
1,197

 
(257
)
 
(21
)%
Financial Services
232

 
233

 
(1
)
 
 %
Corporate and Eliminations
(390
)
 
(456
)
 
66

 
(14
)%
Total
$
10,806

 
$
10,775

 
$
31

 
 %

The Truck segment net sales increase of $182 million, or 2%, was primarily due to improved Core truck volumes, partially offset by lower military sales.
Also impacting the comparative results in sales in the Truck segment was an out-of-period adjustment identified and recorded during the second quarter of 2013. The adjustment was related to certain third-party equipment financings by GE, which we have accounted for as borrowings. The initial transactions do not qualify for revenue recognition as we retain substantial risks of ownership in the leased property. As a result, the proceeds from the transfer are recorded as an obligation and amortized to revenue over the term of the financing. Correcting the errors resulted in a decrease of $113 million to net sales in 2013 related to prior periods.

42





The Parts segment net sales increase of $41 million, or 2%, was primarily due to improvements in our commercial markets, partially offset by a decline in BDP sales. The segment achieved record North America commercial parts channel sales during the year, with sales increasing by $81 million, or 5%, from 2013.
The Global Operations segment net sales decrease of $257 million, or 21%, was primarily due to lower engine volumes in our South American engine operations due to the economic downturn in Brazil, partially offset by increased revenue in our Brazil truck operations. Also impacting the change in segment revenue in 2014 was the unfavorable impact of fluctuations in foreign exchange rates.
The Financial Services segment net revenues were comparable to the prior year period, as a decline in the average finance receivables balance was offset by higher revenues from operating leases.
Costs of products sold
Cost of products sold decreased by $227 million, compared to the prior year, reflecting the impact of lower net sales in the Global Operations segment, as well as lower military sales in our Truck segment. The decrease was partially offset as the Truck segment was impacted by a shift in our Core market to a greater mix of higher cost units that incorporate the SCR after-treatment system.
As described above, in the second quarter of 2013, certain out-of-period adjustments were identified and recorded to correct prior-period errors. As a result of correcting these errors, the cost of products sold of the Truck segment decreased by $113 million in 2013.
In 2014 and 2013, the Company recognized charges for adjustments to pre-existing warranties of $55 million and $404 million, respectively. Included within the warranty charge in 2014 are out-of-period adjustments of $36 million, primarily related to pre-existing warranties, which were identified and recorded to correct prior-period errors. The Truck segment recognized the majority of the adjustments to pre-existing warranties. For more information on warranty, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Restructuring charges
In 2014, we incurred restructuring charges of $42 million compared to $25 million in 2013. The charges in 2014 were primarily related to our Indianapolis, Indiana foundry facility and Waukesha, Wisconsin foundry operations, as well as a reduction-in-force in the U.S. Additionally, in the third quarter of 2014, the Company recognized charges of $14 million related to the 2011 closure of its Chatham, Ontario plant, based on a ruling received from the Financial Services Tribunal in Ontario, Canada. The ruling was upheld in a July 2015 decision issued by the Divisional Court of Ontario. The Company is appealing that decision to the Court of Appeal for Ontario. The charges in 2013 were primarily related to the actions we took in the fourth quarter of 2013 that included an enterprise-wide reduction-in-force. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.
Asset impairment charges
In 2014 we recorded asset impairment charges of $183 million, compared to charges of $97 million in 2013. In 2014, the Global Operations segment recognized a non-cash charge of $149 million for the impairment of certain intangible assets of our Brazilian engine reporting unit. As the economic downturn in Brazil caused declines in actual and forecasted results, we tested the goodwill of our Brazilian engine reporting unit and trademark for potential impairment. As a result, we determined that the entire $142 million balance of goodwill and $7 million attributable to the trademark were impaired.
In addition, in 2014, the Truck segment recorded asset impairment charges of $33 million, which were primarily related to potential sales of assets requiring assessment of impairment for certain intangible and long-lived assets, reflecting our ongoing evaluation of our portfolio of assets to validate their strategic and financial fit.
In 2013, we recorded asset impairment charges of $97 million. In 2013, the Truck segment recognized: (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. 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.

43





Selling, general and administrative expenses
The SG&A expenses decrease of $236 million reflects the impact of our cost-reduction initiatives. In 2014, the Company leveraged efficiencies identified through redesigning our organizational structure (including a reduction-in-force in the U.S. in 2013) and continued to implement new cost-reduction initiatives. For more information, 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 $75 million is primarily due to project rationalization of certain engineering programs and other savings from our cost-reduction initiatives, as well as a shift in spending from projects to integrate the SCR after-treatment systems with certain engine models to projects related to cost reduction and the rationalization of content in our proprietary 13L engine.
Interest expense
In 2014, interest expense decreased by $7 million compared to 2013. The decrease was primarily due to an out-of-period adjustment recorded in 2013, as well as the purchase of certain manufacturing equipment that was previously accounted for as a financing arrangement, related to a sale and leaseback transaction, partially offset by an increase in our average outstanding debt balance compared to 2013. 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.
The change in our average outstanding debt balance was primarily the result of: (i) the issuance of additional 8.25% Senior Notes due 2021 ("the Senior Notes"), in March 2013, (ii) the private sale of the 2018 Convertible Notes, in October 2013, and (iii) the private sale of the 2019 Convertible Notes in April 2014. These were partially offset by: (i) the April 2013 principal payment of $300 million against our Amended Term Loan Credit Facility in conjunction with the repricing of that facility that lowered the interest rate, (ii) the repurchase of a portion of our 2014 Convertible Notes in April 2014 and (iii) the repayment of the remainder of our 2014 Convertible Notes in October 2014.
Other income, net
In 2014, other income decreased by $53 million compared to 2013. The decrease was primarily due to gains recognized in 2013 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 gains recognized in 2014 due to the release of an asset retirement obligation associated with the purchase of certain leased manufacturing assets and gains on asset sales. For more information concerning the sale of the Mahindra Joint Ventures and Bison Coach, see Note 2, Discontinued Operations and Other Divestitures, to the accompanying consolidated financial statements.
Income tax benefit (expense)
In 2014, we recognized an income tax expense from continuing operations of $26 million, compared to a benefit of $171 million in 2013. The difference between the income tax expense in 2014 and the income tax benefit in 2013 is due to the application of intraperiod tax allocation rules, geographical mix, and certain discrete items. The income tax expense in 2014 includes charges of $29 million for the establishment of a valuation allowance on our deferred tax assets related to our Brazilian operations, partially offset by an income tax benefit of $16 million resulting from a tax law change in Brazil. In addition, the application of the intraperiod tax allocation rules resulted in the recognition of an income tax benefit from continuing operations of $13 million and $220 million in 2014 and 2013, respectively. In both periods, the impact of income taxes on U.S. operations was limited to current state income taxes, federal refundable credits, and other discrete items, due in part to the deferred tax valuation allowances on our U.S. deferred tax assets.
At October 31, 2014, we had $2.7 billion of U.S. federal net operating losses and $240 million of federal tax credit carryforwards. 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. 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 that we do not wholly own. Substantially all of our net income attributable to non-controlling interests in 2014 and 2013 relates to Ford's non-controlling interest in BDP.

44





Income (loss) from discontinued operations, net of tax
In 2014, we recognized income from discontinued operations of $3 million, compared to a loss of $41 million in 2013. The income (loss) from discontinued operations was 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. The loss incurred in 2013 also included charges of $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. For more information, see Note 2, Discontinued Operations and Other Divestitures, to the accompanying consolidated financial statements.
Segment Results of Continuing Operations for 2014 as Compared to 2013
Truck Segment
(in millions, except % change)
2014
 
2013
 
Change
 
% Change
Truck segment sales, net
$
7,473

 
$
7,291

 
$
182

 
2
 %
Truck segment loss
(380
)
 
(883
)
 
503

 
(57
)%
Segment sales
The Truck segment net sales increase of $182 million, or 2%, was primarily due to improved Core truck volumes and the impact of certain out-of-period adjustments recorded in the second quarter of 2013. This increase was partially offset by lower military sales, reflecting lower demand for our military products and services. Truck chargeouts from our Core market were up 12%, reflecting a 23% increase of Class 8 heavy trucks, a 14% increase in school buses, and a 9% increase in Class 6 and 7 medium trucks, partially offset by an 11% decrease in Class 8 severe service trucks.
As described above in the Results of Continuing Operations, in the second quarter of 2013, the segment identified and recorded 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 in 2013 related to prior periods.
Segment loss
The Truck segment reduced its segment loss by $503 million, primarily driven by lower charges for adjustments to pre-existing warranties. The Truck segment recorded charges for adjustments related to pre-existing warranties of $51 million in 2014 compared to charges of $403 million in 2013. In addition, gross margin in 2014 was impacted by the continued shift to a greater mix of units that incorporate SCR after-treatment systems.
In 2014, SG&A expenses and Engineering and product development costs continued to decline. SG&A expenses decreased in 2014 by $74 million, reflecting the impact of our cost-reduction initiatives. Engineering and product development costs decreased in 2014 by $61 million, primarily due to project rationalization of certain engineering programs and other savings from cost-reduction initiatives, as well as a shift in spending from projects to integrate the SCR after-treatment systems with certain engine models to projects related to cost reduction and the rationalization of content in our proprietary 13L engine.
In 2014, the segment recorded charges of $2 million for non-conformance penalties ("NCPs"), primarily for certain pre-engine model year 2014 13L engine sales, compared to $36 million in 2013.
In addition, in 2014, the segment recorded certain other charges. The segment recorded asset impairment charges of $33 million, which were primarily related to potential sales of assets requiring assessment of impairment for certain intangible and long-lived assets, reflecting our ongoing evaluation of our portfolio of assets to validate their strategic and financial fit. In 2013, the segment incurred asset impairment charges of $96 million, consisting 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 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. Additionally, in 2013, the Truck segment recognized charges of $39 million for accelerated depreciation of certain assets, primarily related to the planned closure of our Garland, Texas truck manufacturing operations (the "Garland Facility"). 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.

45





Parts Segment
 
 
 
 
 
 
 
% Change
(in millions, except % change)
2014
 
2013
 
Change
 
Parts segment sales, net
$
2,551

 
$
2,510

 
$
41

 
2
%
Parts segment profit
528

 
463

 
65

 
14
%
Segment sales
The Parts segment net sales increase of $41 million, or 2%, was driven by improvements in our commercial markets, partially offset by a decline in BDP sales. The segment achieved record North America commercial parts channel sales during the year, with sales increasing by $81 million, or 5%, from 2013.
Segment profit
The increase in the Parts segment profit of $65 million was primarily due to margin improvements in our commercial markets and lower intercompany "access fees" due to cost-reduction initiatives in the Truck segment. Access fees consist of certain engineering and product development costs, depreciation expense, and SG&A.
Global Operations Segment
 
 
 
 
 
 
 
% Change
(in millions, except % change)
2014
 
2013
 
Change
 
Global Operations segment sales, net
$
940

 
$
1,197

 
$
(257
)
 
(21
)%
Global Operations segment loss
(274
)
 
(12
)
 
(262
)
 
N.M.

Segment sales
The Global Operations segment net sales decrease of $257 million, or 21%, was driven by a decrease of $297 million in our South America engine operations. The continued economic downturn in the Brazil economy has contributed to lower engine volumes of 22% in 2014. Our South American engine operations were also impacted by the devaluation of the Brazilian Real relative to the U.S. Dollar of 9% in 2014, compared to the prior year. The decrease in 2014 was partially offset by a $40 million increase in revenue from our Brazil truck operations.
Segment loss
The Global Operations segment loss increased by $262 million, primarily the result of $149 million of non-cash charges in the second quarter of 2014 for the impairment of the goodwill of our Brazilian engine reporting unit and the related trademark. As the economic downturn in Brazil caused declines in actual and forecasted results, we tested the goodwill of our Brazilian engine reporting unit and trademark for potential impairment during the second quarter of 2014. As a result, we determined that the entire $142 million balance of goodwill and $7 million attributed to a trademark were impaired. For more information, see Note 8, Goodwill and Other Intangible Assets, Net, to the accompanying consolidated financial statements.
In addition, the comparative segment loss increased by $26 million in 2014 as the result of a gain recognized in 2013 related to the sale of the Company's interest in the Mahindra Joint Ventures to Mahindra in February 2013. For more information, see Note 2, Discontinued Operations and Other Divestitures, to the accompanying consolidated financial statements.
In 2014, the remaining increase in segment loss of $87 million was primarily due to the decreased results in our South American engine operations reflecting lower volumes and a $29 million charge, primarily related to inventory, related to our efforts to right-size the truck business due to the current economic conditions in Brazil. This increase was partially offset by lower structural costs of $22 million, primarily due to cost-reduction initiatives and project rationalization of certain engineering programs.

46





Financial Services Segment
 
 
 
 
 
 
 
% Change
(in millions, except % change)
2014
 
2013
 
Change
 
Financial Services segment revenues, net
$
232

 
$
233

 
$
(1
)
 
 %
Financial Services segment profit
97

 
81

 
16

 
20
 %
Segment revenues
In 2014, net revenues in the Financial Services segment were flat compared to 2013, driven by the continued decline in the average retail note receivables balance, partially offset by the higher revenues from operating leases. The decline in the average retail note receivables balance reflects lower loan originations in the U.S., partially offset by higher loan originations in Mexico.
Segment profit
The increase in Financial Services segment profit of $16 million was primarily due to higher interest income from intercompany loans, partially offset by the lower net financial margin due to the decline in the average retail note receivables balance in the U.S. as well as an increase in the provision for loan losses in Mexico.

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 Truck and Global Operations segments.
Truck Industry Retail Deliveries
The following table summarizes approximate industry retail deliveries, for our Core truck market, categorized by relevant class, according to Wards Communications and R.L. Polk & Co. ("Polk"):
 
 
 
2015 vs 2014
 
2014 vs 2013
(in units)
2015
 
2014
 
2013
 
Change
 
% Change
 
Change
 
% Change
Core Markets (U.S. and Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
School buses(A)
29,600

 
28,200

 
26,600

 
1,400

 
5
%
 
1,600

 
6
%
Class 6 and 7 medium trucks
80,000

 
71,000

 
64,000

 
9,000

 
13
%
 
7,000

 
11
%
Class 8 heavy trucks
218,200

 
186,700

 
162,700

 
31,500

 
17
%
 
24,000

 
15
%
Class 8 severe service trucks(B)
60,800

 
56,200

 
48,000

 
4,600

 
8
%
 
8,200

 
17
%
Total Core markets
388,600

 
342,100

 
301,300

 
46,500

 
14
%
 
40,800

 
14
%
Combined class 8 trucks
279,000

 
242,900

 
210,700

 
36,100

 
15
%
 
32,200

 
15
%
Navistar Core retail deliveries
62,600

 
59,800

 
55,500

 
2,800

 
5
%
 
4,300

 
8
%
_________________________
(A)
The School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag.
(B)
Core retail deliveries include CAT-branded units sold to Caterpillar under our North America supply agreement.
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:
 
2015
 
2014
 
2013
Core Markets (U.S. and Canada)
 
 
 
 
 
School buses(A)
38
%
 
35
%
 
37
%
Class 6 and 7 medium trucks
23
%
 
21
%
 
24
%
Class 8 heavy trucks
11
%
 
14
%
 
12
%
Class 8 severe service trucks(B)
15
%
 
16
%
 
22
%
Total Core Markets
16
%
 
17
%
 
18
%
Combined class 8 trucks
12
%
 
14
%
 
15
%
_______________________
(A)
The School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag.
(B)
Retail delivery market share includes CAT-branded units sold to Caterpillar under our North America supply agreement.

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 and buses. 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. The following table summarizes our approximate net orders for Core units:
 
 
 
 
 
 
 
2015 vs 2014
 
2014 vs 2013
(in units)
2015
 
2014
 
2013
 
Change
 
% Change
 
Change
 
% Change
Core Markets (U.S. and Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
School buses(A)
11,400

 
10,300

 
10,200

 
1,100

 
11
 %
 
100

 
1
%
Class 6 and 7 medium trucks
16,700

 
18,300

 
15,300

 
(1,600
)
 
(9
)%
 
3,000

 
20
%
Class 8 heavy trucks
26,700

 
28,900

 
24,500

 
(2,200
)
 
(8
)%
 
4,400

 
18
%
Class 8 severe service trucks(B)
9,100

 
9,300

 
9,000

 
(200
)
 
(2
)%
 
300

 
3
%
Total Core Markets
63,900

 
66,800

 
59,000

 
(2,900
)
 
(4
)%
 
7,800

 
13
%
Combined class 8 trucks
35,800

 
38,200

 
33,500

 
(2,400
)
 
(6
)%
 
4,700

 
14
%
_______________________
(A)
The School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag.
(B)
Orders include CAT-branded units sold to Caterpillar under our North America supply agreement.
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 Core units:
 
 
 
 
 
 
 
2015 vs 2014
 
2014 vs 2013
(in units)
2015
 
2014
 
2013
 
Change
 
% Change
 
Change
 
% Change
Core Markets (U.S. and Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
School buses(A)
1,400

 
2,400

 
3,000

 
(1,000
)
 
(42
)%
 
(600
)
 
(20
)%
Class 6 and 7 medium trucks
4,800

 
7,100

 
4,800

 
(2,300
)
 
(32
)%
 
2,300

 
48
 %
Class 8 heavy trucks
13,900

 
12,100

 
9,600

 
1,800

 
15
 %
 
2,500

 
26
 %
Class 8 severe service trucks(B)
2,100

 
2,300

 
1,800

 
(200
)
 
(9
)%
 
500

 
28
 %
Total Core Markets
22,200

 
23,900

 
19,200

 
(1,700
)
 
(7
)%
 
4,700

 
24
 %
Combined class 8 trucks
16,000

 
14,400

 
11,400

 
1,600

 
11
 %
 
3,000

 
26
 %
_______________________
(A)
The School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag.
(B)
Backlogs include CAT-branded units sold to Caterpillar under our North America supply agreement.

49





Truck Chargeouts
We define chargeouts as trucks that have been invoiced to customers. The units held in dealer inventory represent the principal difference between retail deliveries and chargeouts. The following table summarizes our approximate worldwide chargeouts from our continuing operations:
 
 
 
 
 
 
 
2015 vs 2014
 
2014 vs 2013
(in units)
2015
 
2014
 
2013
 
Change
 
% Change
 
Change
 
% Change
Core Markets (U.S. and Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
School buses(A)
11,900

 
10,800