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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-Q
___________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2020

OR
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_logoa04a01a01a02a18.jpg
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)
(331332-5000
______________________________________________________
Registrant’s telephone number, including area code
 Not applicable
______________________________________________________
(Former name, former address, and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10
NAV
New York Stock Exchange
Cumulative convertible junior preference stock, Series D (par value $1.00)
NAV-D
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 such files).    Yes  þ    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
Accelerated filer
 
o
Emerging growth company
 
o
Non-accelerated filer
 
o
Smaller reporting company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes       No  þ
As of February 29, 2020, the number of shares outstanding of the registrant’s common stock was 99,490,916, net of treasury shares.
 
 
 
 
 



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

2






Disclosure Regarding Forward-Looking Statements

Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements only speak as of the date of this report and Navistar International Corporation assumes no obligation to update the information included in this report.
Such forward-looking statements include, but are not limited to, statements concerning:
estimates we have made in preparing our financial statements;
the implementation of, and expected benefits from, our strategic alliance with TRATON SE and certain of its subsidiaries and affiliates ("TRATON Group");
our development and launch 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 short-term and long-term goals and activities to accomplish such strategies and goals;
our ability to implement our strategy and the results we expect to achieve from the implementation of our strategy;
our expectations related to new product launches;
anticipated results from acquisitions, dispositions, strategic alliances, and joint ventures we complete;
our expectations and estimates relating to restructuring activities, including restructuring charges and timing of cash payments related thereto, and operational flexibility, savings, and efficiencies from such restructurings;
our expectations relating to debt refinancing activities;
our expectations relating to the potential effects of anticipated divestitures and closures of businesses;
our expectations relating to our cost-reduction actions and actions to reduce discretionary spending;
our expectations relating to our ability to service our long-term debt;
our expectations relating to our wholesale and retail finance receivables and revenues;
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, other intangible assets, and property, plant and equipment;
costs relating to litigation and similar matters;
estimates relating to pension plan contributions and unfunded pension and postretirement benefits;
our expectations relating to commodity price risk, including the impact of tariff increases or potential new tariffs; and
anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations.

3





These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our results of operations and could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to differences in our future financial results include those discussed in Item 1A, Risk Factors, included within our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 which was filed on December 17, 2019, and our quarterly report on Form 10-Q for the period ended January 31, 2020, 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 Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as a result, are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the United States ("U.S.") Securities and Exchange Commission ("SEC"). We make these filings available free of charge on our website (http://www.navistar.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC.

4





PART I—Financial Information
Item 1.
Financial Statements
Navistar International Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended January 31,
(in millions, except per share data)
2020
 
2019
Sales and revenues
 
 
 
Sales of manufactured products, net
$
1,794

 
$
2,386

Finance revenues
44

 
47

Sales and revenues, net
1,838

 
2,433

Costs and expenses
 
 
 
Costs of products sold
1,529

 
1,979

Restructuring charges
1

 

Asset impairment charges

 
2

Selling, general and administrative expenses
182

 
186

Engineering and product development costs
86

 
86

Interest expense
65

 
85

Other expense, net
11

 
97

Total costs and expenses
1,874

 
2,435

Equity in loss of non-consolidated affiliates
(1
)
 

Loss before income tax
(37
)
 
(2
)
Income tax benefit
5

 
19

Net income (loss)
(32
)
 
17

Less: Net income attributable to non-controlling interests
4

 
6

Net income (loss) attributable to Navistar International Corporation
$
(36
)
 
$
11

 
 
 
 
Income (loss) per share attributable to Navistar International Corporation:
 
 
 
Basic
$
(0.36
)
 
$
0.11

Diluted
(0.36
)
 
0.11

 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
99.5

 
99.1

Diluted
99.5

 
99.4


See Notes to Consolidated Financial Statements
5



Navistar International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) 
(in millions)
Three Months Ended January 31,
2020

2019
Net income (loss)
$
(32
)
 
$
17

Foreign currency translation adjustment
(8
)
 
14

Defined benefit plans, net of tax
25

 
115

Total other comprehensive income
17

 
129

Comprehensive income (loss)
(15
)
 
146

Less: Net income attributable to non-controlling interests
4

 
6

Total comprehensive income (loss) attributable to Navistar International Corporation
$
(19
)
 
$
140


See Notes to Consolidated Financial Statements
6



Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
 
As of January 31, 2020
 
As of October 31, 2019
(in millions, except per share data)
 
 
 
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,000

 
$
1,370

Restricted cash and cash equivalents
50

 
133

Trade and other receivables, net
269

 
338

Finance receivables, net
1,615

 
1,923

Inventories, net
1,074

 
911

Other current assets
279

 
277

Total current assets
4,287

 
4,952

Restricted cash
87

 
54

Trade and other receivables, net
10

 
10

Finance receivables, net
268

 
274

Investments in non-consolidated affiliates
30

 
31

Property and equipment (net of accumulated depreciation and amortization of $2,390 and $2,488, respectively)
1,283

 
1,309

Operating lease right of use assets
107

 

Goodwill
38

 
38

Intangible assets (net of accumulated amortization of $141 and $142, respectively)
23

 
25

Deferred taxes, net
127

 
117

Other noncurrent assets
103

 
107

Total assets
$
6,363

 
$
6,917

LIABILITIES and STOCKHOLDERS’ DEFICIT
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
452

 
$
871

Accounts payable
1,286

 
1,341

Other current liabilities
1,293

 
1,363

Total current liabilities
3,031

 
3,575

Long-term debt
4,283

 
4,317

Postretirement benefits liabilities
2,056

 
2,103

Other noncurrent liabilities
732

 
645

Total liabilities
10,102

 
10,640

Stockholders’ deficit
 
 
 
Series D convertible junior preference stock
2

 
2

Common stock, $0.10 par value per share (103.1 shares issued and 220 shares authorized at both dates)
10

 
10

Additional paid-in capital
2,730

 
2,730

Accumulated deficit
(4,256
)
 
(4,409
)
Accumulated other comprehensive loss
(2,084
)
 
(1,912
)
Common stock held in treasury, at cost (3.7 and 3.9 shares, respectively)
(143
)
 
(147
)
Total stockholders’ deficit attributable to Navistar International Corporation
(3,741
)
 
(3,726
)
Stockholders’ equity attributable to non-controlling interests
2

 
3

Total stockholders’ deficit
(3,739
)
 
(3,723
)
Total liabilities and stockholders’ deficit
$
6,363

 
$
6,917


See Notes to Consolidated Financial Statements
7



Navistar International Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended January 31,
(in millions)
2020
 
2019
Cash flows from operating activities
 
 
 
Net income (loss)
$
(32
)
 
$
17

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
35

 
33

Depreciation of equipment leased to others
15

 
15

Deferred taxes, including change in valuation allowance
(10
)
 
(41
)
Asset impairment charges

 
2

Gain on sales of investments and businesses, net

 
(59
)
Amortization of debt issuance costs and discount
3

 
6

Stock-based compensation
5

 

Provision for doubtful accounts
4

 
1

Equity in loss of non-consolidated affiliates, net of dividends
1

 

Other non-cash operating activities
(2
)
 
(1
)
Changes in other assets and liabilities, exclusive of the effects of businesses disposed
80

 
(213
)
Net cash provided by (used in) operating activities
99

 
(240
)
Cash flows from investing activities
 
 
 
Maturities of marketable securities

 
61

Capital expenditures
(59
)
 
(44
)
Purchases of equipment leased to others
(7
)
 
(42
)
Proceeds from sales of property and equipment
2

 
3

Proceeds from sales of investments and businesses
10

 
95

Other investing activities

 
1

Net cash provided by (used in) investing activities
(54
)
 
74

Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt
8

 

Principal payments on securitized debt
(16
)
 
(22
)
Net change in secured revolving credit facilities
(315
)
 
48

Proceeds from issuance of non-securitized debt
18

 
27

Principal payments on non-securitized debt
(65
)
 
(61
)
Net change in notes and debt outstanding under revolving credit facilities
(88
)
 
83

Debt issuance costs

 
(1
)
Proceeds from financed lease obligations

 
6

Proceeds from exercise of stock options
2

 
1

Dividends paid by subsidiaries to non-controlling interest
(5
)
 
(8
)
Net cash provided by (used in) financing activities
(461
)
 
73

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(4
)
 
(3
)
Decrease in cash, cash equivalents and restricted cash
(420
)
 
(96
)
Cash, cash equivalents and restricted cash at beginning of the period
1,557

 
1,445

Cash, cash equivalents and restricted cash at end of the period
$
1,137

 
$
1,349


See Notes to Consolidated Financial Statements
8



Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit
(Unaudited)
(in millions)
Series D
Convertible
Junior
Preference
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Common
Stock
Held in
Treasury,
at cost
 
Stockholders'
Equity
Attributable
to Non-controlling
Interests
 
Total
Balance as of October 31, 2019
$
2

 
$
10

 
$
2,730

 
$
(4,409
)
 
$
(1,912
)
 
$
(147
)
 
$
3

 
$
(3,723
)
Net income (loss)

 

 

 
(36
)
 

 

 
4

 
(32
)
Total other comprehensive income

 

 

 

 
17

 

 

 
17

Reclassification of stranded tax effects

 

 

 
189

 
(189
)
 

 

 

Stock-based compensation

 

 
2

 

 

 

 

 
2

Stock ownership programs

 

 
(2
)
 

 

 
4

 

 
2

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(5
)
 
(5
)
Balance as of January 31, 2020
$
2

 
$
10

 
$
2,730

 
$
(4,256
)
 
$
(2,084
)
 
$
(143
)
 
$
2

 
$
(3,739
)
Balance as of October 31, 2018
$
2

 
$
10

 
$
2,731

 
$
(4,593
)
 
$
(1,920
)
 
$
(161
)
 
$
5

 
$
(3,926
)
Net income

 

 

 
11

 

 

 
6

 
17

Total other comprehensive income

 

 

 

 
129

 

 

 
129

ASC-606 modified retrospective adoption

 

 

 
(27
)
 

 

 

 
(27
)
Stock-based compensation

 

 
2

 

 

 

 

 
2

Stock ownership programs

 

 
(1
)
 

 

 
1

 

 

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(8
)
 
(8
)
Balance as of January 31, 2019
$
2

 
$
10

 
$
2,732

 
$
(4,609
)
 
$
(1,791
)
 
$
(160
)
 
$
3

 
$
(3,813
)


See Notes to Consolidated Financial Statements
9



Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Organization and Description of the Business
Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating entities are Navistar, Inc. ("NI") and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer collectively to NIC and its consolidated subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Parts, Global Operations (collectively called "Manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively called "Financial Services operations"). These segments are discussed in Note 13, Segment Reporting.
Our fiscal year ends on October 31. As such, all references to 2020, 2019, and other years contained within this Quarterly Report on Form 10-Q relate to the fiscal year, unless otherwise indicated.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our Manufacturing operations and our Financial Services operations, including VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts.
We prepared the accompanying unaudited consolidated financial statements in accordance with United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for comprehensive annual financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended October 31, 2019, which should be read in conjunction with the disclosures therein. In our opinion, these interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.
Variable Interest Entities
We have an interest in several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our VIEs that we are the primary beneficiary because we have the power to direct the activities of the VIE that most significantly impact its economic performance and we have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. Accordingly, we include in our consolidated financial statements the assets and liabilities and results of operations of those entities, even though we may not own a majority voting interest. The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather they represent claims against the specific assets of these VIEs. Assets of these entities are not readily available to satisfy claims against our general assets.
We are the primary beneficiary of our Blue Diamond Parts, LLC ("BDP") joint venture with Ford Motor Company ("Ford"). As a result, our Consolidated Balance Sheets include assets of $24 million and $32 million as of January 31, 2020 and October 31, 2019, respectively, and liabilities of $3 million and $4 million, respectively. As of January 31, 2020 and October 31, 2019, assets include $10 million and $2 million of cash and cash equivalents, respectively, which are not readily available to satisfy claims against our general assets. The creditors of BDP do not have recourse to our general credit. In October 2019, Ford notified us of its intention to dissolve the BDP joint venture effective October 2021.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets of $722 million and $927 million as of January 31, 2020 and October 31, 2019, respectively, and liabilities of $648 million and $838 million as of January 31, 2020 and October 31, 2019, respectively, all of which are involved in securitizations that are treated as asset-backed debt. In addition, our Consolidated Balance Sheets include secured assets of $311 million and $537 million as of January 31, 2020 and October 31, 2019, respectively, and corresponding liabilities of $147 million and $279 million, at the respective dates, which are related to other secured transactions that do not qualify for sale accounting treatment, and, therefore, are treated as borrowings secured by operating and finance leases. Investors that hold securitization debt have a priority claim on the cash flows generated by their respective securitized assets to the extent that the related VIEs are required to make principal and interest payments. Investors in securitizations of these entities have no recourse to our general credit.

10




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



We also have an interest in other VIEs, which we do not consolidate because we are not the primary beneficiary. Our financial support and maximum loss exposure relating to these non-consolidated VIEs are not material to our financial condition, results of operations, or cash flows.
We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability to exercise significant influence over operating and financial policies. Equity in loss of non-consolidated affiliates includes our share of the net loss of these entities.
Related Party Transactions
We have a series of commercial relationships and agreements with TRATON SE and certain of its subsidiaries and affiliates ("TRATON Group") for royalties related to use of certain engine technology, contract manufacturing operations performed by us, the sale of engines, the sale and purchase of parts, and a procurement joint venture. We also have development agreements with TRATON Group involving certain engine and transmission projects. This development work is being expensed as incurred. Revenue recognized for the three months ended January 31, 2020 and 2019 was approximately $31 million and $29 million, respectively. Net expenses incurred for the three months ended January 31, 2020 and 2019 were $17 million and $13 million, respectively, included primarily in Engineering and product development costs on our Consolidated Statements of Operations. Our receivable from TRATON Group was $17 million and $13 million as of January 31, 2020 and October 31, 2019, respectively. Our payable to TRATON Group was $69 million and $55 million as of January 31, 2020 and October 31, 2019, respectively.
We have an exclusive long-term agreement to supply military and commercial parts and chassis to our former defense business, ND Holdings, LLC (“Navistar Defense”), in which we retain a 30% ownership interest. We also entered into an intellectual property agreement and a transition services agreement. For the three months ended January 31, 2020 and 2019, revenue recognized was approximately $14 million and $6 million, respectively. As of January 31, 2020 and October 31, 2019, our receivables from Navistar Defense were $27 million and $29 million, respectively.
Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is principally determined using the first-in, first-out method. Our gross used truck inventory was $253 million at January 31, 2020 compared to $200 million at October 31, 2019, offset by reserves of $53 million and $37 million, respectively.
Property and Equipment
We report land, buildings, leasehold improvements, machinery and equipment (including tooling and pattern equipment), furniture, fixtures, and equipment, and equipment leased to others at cost, net of depreciation. We initially record assets under capital lease obligations at the lower of their fair value or the present value of the aggregate future minimum lease payments. We depreciate our assets using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets.
We test for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (hereinafter referred to as "asset group") may not be recoverable by comparing the sum of the estimated undiscounted future cash flows expected to result from the operation of the asset group and its eventual disposition to the carrying value.
Continued economic weakness in Brazil has resulted in a decline in forecasted results for the Brazilian asset group, which is included in the Global Operations segment. It is reasonably possible that within the next twelve months, we could recognize impairment charges if we experience adverse changes in our business including further declines in profitability due to changes in volume, market pricing, cost, or the business environment. Significant adverse changes to our business environment and future cash flows could cause us to record impairment charges in future periods, which could be material.

11




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



Product Warranty Liability
The following table presents accrued product warranty and deferred warranty revenue activity:
 
Three Months Ended January 31,
(in millions)
2020
 
2019
Balance at beginning of period
$
510

 
$
529

Costs accrued and revenues deferred
35

 
52

Adjustments to pre-existing warranties(A)
4

 
(7
)
Payments and revenues recognized
(67
)
 
(68
)
Other adjustments(B)

 
12

Balance at end of period
482

 
518

Less: Current portion
201

 
257

Noncurrent accrued product warranty and deferred warranty revenue
$
281

 
$
261

_________________________
(A)
Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior fiscal periods. Such adjustments typically occur when claims experience deviates from historic and expected trends. Our warranty liability is generally affected by component failure rates, repair costs, and the timing of failures. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.
(B)
Other adjustments in the three months ended January 31, 2019 include a $14 million increase in revenues deferred in connection with the adoption of the new revenue standard (as defined below regarding Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 606), partially offset by a $2 million reduction in liability related to the sale of a majority interest in our defense business, Navistar Defense.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts, tax contingency accruals and valuation allowances, product warranty accruals, asbestos and other product liability accruals, asset impairment charges, restructuring charges and litigation-related accruals. Actual results could differ from our estimates.
Concentration Risks
Our financial condition, results of operations, and cash flows are subject to concentration risks related to our significant unionized workforce. As of January 31, 2020, approximately 7,200, or 99%, of our hourly workers and approximately 700, or 13%, of our salaried workers, are represented by labor unions and are covered by collective bargaining agreements. Our future operations may be affected by changes in governmental procurement policies, budget considerations, changing national defense requirements, and political, regulatory and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).
Recently Adopted Accounting Standards
In February 2018, the FASB issued Accounting Standard Update ("ASU") No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)". This ASU provides guidance on a reclassification from accumulated other comprehensive income to retained earnings for the effect of the tax rate change resulting from the Tax Act. The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. We adopted this ASU on November 1, 2019 which resulted in a decrease to Accumulated deficit and an increase of Accumulated other comprehensive loss on our Consolidated Balance Sheet in the amount of $189 million related to the reclassification of the stranded tax effects.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement". This ASU provides guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) and determining when the arrangement includes a software license. We early adopted this ASU on November 1, 2019 which resulted in an immaterial impact on our consolidated financial statements.

12




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



In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842), and subsequently issued various ASUs to clarify the implementation guidance in ASU 2016-02. This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. We adopted this ASU by using the optional modified retrospective basis on November 1, 2019, with no effect on our Accumulated deficit.
We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs, as well as the practical expedient related to land easements. We did not elect the use-of-hindsight. For lessor accounting, we elected to exclude taxes collected from customers, such as sales, use and value added, from the measurement of lease income and expense.
We evaluated our lease population to assess the effect of the guidance on our consolidated financial statements and recorded right of use assets for operating leases related to certain property and equipment of $111 million and lease liabilities of $114 million. The new lease standard also resulted in changes in the classification of certain sales that were recorded as borrowings, as we retained control of the related equipment, in Long-term debt in our Consolidated Balance Sheets. Under the new lease standard, on a prospective basis, these transactions are classified as operating lease liabilities recognized as Other current liabilities and Other noncurrent liabilities in our Consolidated Balance Sheets. In addition, the new lease standard requires lessors to classify cash receipts from leases within operating activities. As a result, cash receipts from operating leases which were accounted for as borrowings are presented as an operating cash inflow rather than the previous presentation as a financing cash inflow.
The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Recently Issued Accounting Standards
In December 2019, the FASB issued Accounting Standard Update ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". This ASU simplifies the accounting for income taxes by removing certain exceptions previously included in the guidance. In addition, the ASU provides new guidance on accounting for specific taxes and minor codification improvements. This ASU is effective for us in the first quarter of fiscal 2022, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” (Topic 326), and subsequently issued various ASUs to clarify the implementation guidance in ASU 2016-13. This ASU sets forth an expected credit loss model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, and certain off-balance sheet credit exposures. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Adoption will require a modified retrospective transition. This ASU is effective for us in the first quarter of fiscal 2021. The impact of this ASU on our consolidated financial statements will primarily result from our Financial Services operations and certain financial guarantees, and will largely depend on economic conditions and forecasts existing at the time of adoption.


13




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



2. 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:
(in millions)
Truck
 
Parts
 
Global Operations
 
Financial
Services
 
Corporate
and
Eliminations
 
Total
Three Months Ended January 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Truck products and services(A)
$
1,075

 
$

 
$

 
$

 
$
3

 
$
1,078

Truck contract manufacturing
97

 

 

 

 

 
97

Used trucks
41

 

 

 

 

 
41

Engines

 
50

 
47

 

 

 
97

Parts

 
442

 
14

 

 

 
456

Extended warranty contracts
25

 

 

 

 

 
25

Sales of manufactured products, net
1,238

 
492

 
61

 

 
3

 
1,794

Retail financing(C)

 

 

 
37

 
(2
)
 
35

Wholesale financing(C)

 

 

 
9

 

 
9

Finance revenues

 

 

 
46

 
(2
)
 
44

Sales and revenues, net
$
1,238

 
$
492

 
$
61

 
$
46

 
$
1

 
$
1,838

(in millions)
Truck
 
Parts
 
Global Operations
 
Financial
Services
 
Corporate
and
Eliminations
 
Total
Three Months Ended January 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Truck products and services(A)(B)
$
1,677

 
$

 
$

 
$

 
$
3

 
$
1,680

Truck contract manufacturing
18

 

 

 

 

 
18

Used trucks
51

 

 

 

 

 
51

Engines

 
66

 
45

 

 

 
111

Parts
1

 
480

 
16

 

 

 
497

Extended warranty contracts