Revenue

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Disaggregation of Revenue

The following tables disaggregate our external revenue by product type for the three and six months ended April 30, 2019 (in millions):



(in millions)	Truck		Parts		Global Operations		Financial Services		Corporate and Eliminations		Total
Three Months Ended April 30, 2019
Truck products and services^(A)	$	2,099	$	—	$	—	$	—	$	3	$	2,102
Truck contract manufacturing	112		—		—		—		—		112
Used trucks	46		—		—		—		—		46
Engines	—		78		60		—		—		138
Parts	1		500		20		—		—		521
Extended warranty contracts	29		—		—		—		—		29
Sales of manufactured products, net	2,287		578		80		—		3		2,948
Retail financing^(C)	—		—		—		36		—		36
Wholesale financing^(C)	—		—		—		12		—		12
Sales and revenues, net	$	2,287	$	578	$	80	$	48	$	3	$	2,996



(in millions)	Truck		Parts		Global Operations		Financial Services		Corporate and Eliminations		Total
Six Months Ended April 30, 2019
Truck products and services^(A)(B)	$	3,776	$	—	$	—	$	—	$	6	$	3,782
Truck contract manufacturing	130		—		—		—		—		130
Used trucks	97		—		—		—		—		97
Engines	—		144		105		—		—		249
Parts	2		980		36		—		—		1,018
Extended warranty contracts	58		—		—		—		—		58
Sales of manufactured products, net	4,063		1,124		141		—		6		5,334
Retail financing^(C)	—		—		—		71		—		71
Wholesale financing^(C)	—		—		—		24		—		24
Sales and revenues, net	$	4,063	$	1,124	$	141	$	95	$	6	$	5,429

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(A)	Includes other markets primarily consisting of Bus, Export Truck and Mexico. Also, includes revenue of $2 million and $5 million for the three and six months ended April 30, 2019, respectively, related to certain third-party financings initially recorded as borrowings, and operating lease revenue of $1 million for both periods.


(B)	Includes military sales of $62 million. In December 2018, we completed the sale of a 70% equity interest in Navistar Defense. See Note 3, Restructuring, Impairments and Divestitures for additional information.


(C)	Retail financing and Wholesale financing revenues in the Financial Services segment include interest revenue of $14 million and $12 million for the three months ended April 30, 2019, respectively, and $27 million and $24 million for the six months ended April 30, 2019, respectively.

Trucks, Truck Contract Manufacturing, Used trucks, Engines and Parts

Revenue for our Truck products and services, certain truck contract manufacturing, Used trucks, certain Engines and Parts is recognized at a point in time when control is transferred to the customer. Our Trucks, Used trucks, Engines, and Parts have a standard warranty, the estimated cost of which is included in Costs of products sold. Operating lease and borrowing revenues are recognized on a straight-line basis over the life of the lease.

Prior to our sale of a 70% equity interest in Navistar Defense, certain truck sales to the U.S. government of non-commercial products manufactured to government specification were recognized over time as the goods were manufactured. Certain truck and other contract manufacturing arrangements, unrelated to Navistar Defense, continue to be recognized over time. We recognize revenue over time when the finished assets have no alternative use and we have a right to payment for work performed in the event of a contract cancellation or when we create or enhance an asset that the customer controls as it is being created or enhanced. We recognize revenue using a cost-based input method because it best depicts our progress in satisfying the performance obligation. The selection of the method requires judgement and is based on the nature of the products or services to be provided.

Certain terms or modifications to U.S. and foreign government contracts may have been unpriced; that is, the work to be performed was defined, but the related contract price was to be negotiated at a later date. In situations where we could reliably estimate a profit margin in excess of costs incurred, revenue and gross margin were recorded for delivered contract items. Otherwise, revenue was recognized when the price had been agreed with the applicable government and costs were deferred when it was probable that the costs would be recovered.

An allowance for parts sales returns is recorded as a reduction to revenue based upon estimates using historical information about returns. This includes when the Company is a reseller of certain service parts that include a core component. A core component is the basic forging or casting, such as an engine block, that can be remanufactured by a certified remanufacturing supplier. When a dealer returns a core component within the specified eligibility period, we refund the core return deposit, which is applied to the customer's account balance.

Extended Warranty Contracts

We sell separately-priced extended warranty contracts that can be purchased for periods ranging from one to ten years. Warranty revenue related to extended warranty contracts is recognized over the life of the contract in proportion to the costs expected to be incurred in satisfying the obligation under the contract. Costs under extended warranty contracts are expensed as incurred. We recognize losses on defined pools of extended warranty contracts when the remaining expected costs for a given pool of contracts exceed the related deferred revenue.

Retail and Wholesale Financing

Financial Services operations recognize revenue from retail notes, finance leases, wholesale notes, retail accounts, and wholesale accounts as Finance revenues over the term of the receivables utilizing the effective interest method. Certain direct origination costs and fees are deferred and recognized as adjustments to yield and are reported as part of interest income over the life of the receivable. Loans are impaired when we conclude it is probable the customer will not be able to make full payment according to contractual terms after reviewing the customer's financial performance, payment ability, capital-raising potential, management style, economic situation, and other factors. The accrual of interest on such loans is suspended when the loan becomes 90 days or more past due. Finance revenues on these loans are recognized only to the extent cash payments are received. We resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured.

Operating lease revenues are recognized on a straight-line basis over the life of the lease. Recognition of revenue is suspended when management determines the collection of future revenue is not probable. Recognition of revenue is resumed if collection again becomes probable.

Performance Obligations

Generally, revenue from our sales is recognized at a point in time when control is transferred to the customer which generally occurs upon shipment from our plants and distribution centers or at the time of delivery to our customers. The standard payment term is less than 30 days, but we may extend payment terms on selected receivables. We have elected the practical expedient that allows the Company to not assess whether a contract has a significant financing component when the time between cash collection and transfer of control is less than one year.

We recognize price allowances, returns and the cost of incentive programs in the normal course of business based on programs offered to dealers or fleet customers. Estimates are made for sales incentives on certain vehicles in dealer stock inventory based on historical experience and announced special programs. The estimated sales incentives and returns are adjusted at the earlier of when the estimate of consideration we expect to receive changes or the consideration becomes fixed. For contracts where there is more than one performance obligation, discounts are allocated to all of the performance obligations in the contract based on their relative standalone selling prices.

Revenue on bill and hold arrangements is not recognized until after the customer is notified that the product (i) has been completed according to customer specifications, (ii) has passed our quality control inspections, (iii) is ready for physical transfer to the customer and (iv) the reason for the bill and hold arrangement is substantive.

We have elected to account for shipping and handling activities that occur subsequent to transfer of control as a fulfillment cost and not as a separate performance obligation. The costs are recognized as an expense in Costs of products sold when incurred. As a practical expedient, we do not disclose the transaction price related to order backlogs as they have an original expected duration of less than one year.

We exclude from revenue any sales taxes, value added taxes and other related taxes collected from customers.

The impact of changes to revenue related to performance obligations satisfied in prior periods was not material to our consolidated financial statements in the second quarter of 2019.

Contract Balances

Most of our contracts are for a period of less than one year. We have certain long-term contract manufacturing and extended warranty contracts that extend beyond one year. We record deferred revenue, primarily related to extended warranty contracts, when we receive consideration from a customer prior to transferring goods or services under the terms of a sales contract. This deferred revenue represents contract liabilities which are included in our Consolidated Balance Sheets as components of current and long-term liabilities. The amount of manufacturing contract liabilities is not material to our consolidated financial statements.

The amount of deferred revenue related to extended warranty contracts was $271 million and $255 million at April 30, 2019 and October 31, 2018, respectively. Revenue recognized under our extended warranty programs was $29 million and $58 million for the three and six months ended April 30, 2019, respectively, and $27 million and $56 million for the three and six months ended April 30, 2018, respectively. We expect to recognize revenue under our extended warranty programs of approximately $47 million in the remainder of 2019, $80 million in 2020, $64 million in 2021, $42 million in 2022, $22 million in 2023 and $16 million thereafter.

Contract Costs

We recognize incremental costs to obtain contracts as an asset if they are recoverable. As a practical expedient, we recognize the costs of obtaining a contract as an expense when the related contract period is less than one year. We have no contract costs capitalized as of April 30, 2019.