Leases (Notes)

6 Months Ended

Apr. 30, 2020

Leases [Abstract]

Lessor, Operating Leases [Text Block]

Leases

We account for a lease when an asset has been identified and when the contract conveys the right to control the use of the identified asset in exchange for consideration for a period of time. We determine whether an arrangement is or contains a lease at inception.

Lessee

We lease certain land, buildings, and equipment under operating and finance leases for our distribution centers, manufacturing facilities and our corporate offices, expiring at various dates through 2030. Operating leases generally have 1 to 20 year terms, with options to extend the lease. Terms are generally negotiated at the time of renewal. Options to terminate are not common and may be included at the discretion of the lessor. Certain leases may include provisions for rent escalation based on actual costs incurred by the lessor. Variable lease payments, which are not material, are not included as right of use assets or lease liabilities in our Consolidated Balance Sheets, and are expensed as incurred. Generally, our lease agreements do not contain any residual value guarantees or restrictive covenants.

All real estate leases and equipment leases, with an initial term greater than 12 months, result in the recognition of a right of use asset and lease liability recognized on our Consolidated Balance Sheets. Certain equipment leases with a term less than 12 months do not result in the recognition of right of use assets or lease liabilities. We recognize lease expense for those leases, which are not material, on a straight-line basis over the lease term.

We sublease certain real estate to third parties. In the second quarter of 2020, sublease income earned was not material to our Consolidated Statements of Operations.

We generally combine fixed lease and non-lease components for those leases we have entered into or reassessed after the adoption of the new lease standard. These assets primarily include real estate, manufacturing equipment and vehicles. The implicit rate of the majority of our leases is not known; therefore we use our incremental borrowing rate in determining the present value of lease payments. For leases denominated in a foreign currency, the incremental borrowing rate is adjusted by replacing the U.S. credit-free spread with that of the specific country.

In the second quarter and first half of 2020, we incurred operating lease costs recorded in Costs of products sold of $2 million and $4 million, respectively. In the second quarter and first half of 2020, we incurred operating lease costs recorded in SG&A expenses of $6 million and $12 million, respectively. These charges were recognized in our Consolidated Statements of Operations. Finance lease costs were not material to our Consolidated Statements of Operations.

The following table presents balance sheet information related to operating leases:

(in millions)	As of April 30, 2020
Operating lease right of use assets	$	121
Finance lease right of use assets(A)	2
Total right of use assets	$	123
Operating lease liabilities
Other current liabilities	$	30
Other noncurrent liabilities	94
Finance lease liabilities
Notes payable and current maturities of long-term debt	1
Long-term debt	1
Total lease liabilities	$	126

_________________________

(A) Finance lease right of use assets are included in Property and Equipment, net on our Consolidated Balance Sheets.

The following table presents maturities of lease liabilities:

	As of April 30, 2020
(in millions)	Finance Leases		Operating Leases
Remainder of 2020	$	—	$	17
2021	1		33
2022	1		25
2023	—		20
2024	—		13
Thereafter	—		32
Total lease payments	2		140
Less: Present value discount	—		16
Total lease liabilities	$	2	$	124

The following table presents future minimum lease payments:

	As of October 31, 2019
(in millions)	Capital Lease Obligations		Operating Leases
2020	$	1	$	37
2021	1		28
2022	—		22
2023	—		18
2024	—		13
Thereafter	—		31
Total future minimum lease payments	$	2	$	149

The following table presents cash flow information related to leases:

(in millions)	Three Months Ended April 30, 2020		Six Months Ended April 30, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	10	$	19
Right of use assets obtained in exchange for lease liabilities
Operating leases	$	24	$	28

The following table presents the weighted-average remaining lease term and discount rate:

	As of April 30, 2020
	Finance Leases		Operating Leases
Weighted-average remaining lease term	9.0 years		5.7 years
Weighted-average discount rate	5.9	%	4.3	%

Lessor

We primarily lease trucks, tractors, and trailers to retail customers and dealers in the U.S. and Mexico through our Financial Services segment. These leases are classified as either operating or finance leases, expire at various dates, and typically have terms which allow an extension or fair value options to purchase the asset at the end of the lease term. The terms of leases generally range from 2 to 7 years, though extension periods may be for a shorter time. Our Financial Services segment manages the relationship with Navistar Capital (a program of BMO Harris Bank N.A. and Bank of Montreal (together, “BMO”)). Navistar Capital is our third-party preferred source of retail and lease customer financing for equipment offered by us and our dealers in the U.S.  For certain Navistar Capital financed contracts which contain an end of term option for us to purchase the leased equipment if the customer declines to do so, we recognize the equipment subject to an operating lease as an asset on our Consolidated Balance Sheets.  For more information related to the BMO arrangement, see Note 12, Commitments and Contingencies. We have also leased certain real estate to third parties to manage excess capacity through our Corporate segment.

We depreciate trucks, tractors, and trailers leased to customers under operating lease agreements on a straight-line basis to the equipment's estimated residual value over the lease term. The residual values of the equipment leased under operating lease agreements represent estimates of the value of the assets at the end of the lease contracts and are initially recorded based on estimates of future market values. Realization of the residual values is dependent on our future ability to market the equipment. We work with our customers and dealers to manage the sale of lease returns and the recovery of residual exposure. We also review residual values periodically to determine that recorded amounts are appropriate and the equipment is not impaired. For more information on key inputs and valuation methodologies in evaluating impairment of assets under operating lease agreements, see Note 11, Fair Value Measurements. For more information regarding impaired finance receivables see Note 5, Allowance for Doubtful Accounts, and Note 3, Restructuring, Impairments and Divestitures for impaired assets under operating leases.

The following table presents revenue from finance and operating leases, included in our Consolidated Statement of Operations:

	Three Months Ended April 30, 2020				Six Months Ended April 30, 2020
(in millions)	Finance Leases(A)		Operating Leases		Finance Leases(A)		Operating Leases
Sales of manufactured products, net	$	—	$	4	$	—	$	12
Finance revenues	11		22		18		41
Other expense, net	—		2		—		3
Total lease revenue	$	11	$	28	$	18	$	56

_______________________

(A) Finance revenues consist primarily of interest income. Additional fees, such as late fees, are not material to our consolidated financial statements.

The following table presents the carrying amount of equipment leased to others, included in Property Plant and Equipment, net in our Consolidated Balance Sheets:

(in millions)	April 30, 2020		October 31, 2019
Equipment leased to others, at original cost	$	484	$	562
Less: Accumulated depreciation	118		125
Equipment leased to others, net	$	366	$	437

The following table presents payments due from operating leases:

(in millions)	April 30, 2020
Remainder of 2020	$	64
2021	81
2022	71
2023	52
2024	31
Thereafter	43
Total	$	342

The following table presents maturities of finance lease receivables reconciled to the net investment in finance leases:

(in millions)	April 30, 2020
Remainder of 2020	$	74
2021	62
2022	44
2023	22
2024	9
Thereafter	2
Total	213
Less: Unearned interest income	43
Net investment in finance leases	$	170

Operating and finance lease contracts generally may be repaid or refinanced prior to contractual maturity. Accordingly, this presentation should not be regarded as a forecast of future cash.

Lessee, Finance Leases [Text Block]

Leases

We account for a lease when an asset has been identified and when the contract conveys the right to control the use of the identified asset in exchange for consideration for a period of time. We determine whether an arrangement is or contains a lease at inception.

Lessee

We lease certain land, buildings, and equipment under operating and finance leases for our distribution centers, manufacturing facilities and our corporate offices, expiring at various dates through 2030. Operating leases generally have 1 to 20 year terms, with options to extend the lease. Terms are generally negotiated at the time of renewal. Options to terminate are not common and may be included at the discretion of the lessor. Certain leases may include provisions for rent escalation based on actual costs incurred by the lessor. Variable lease payments, which are not material, are not included as right of use assets or lease liabilities in our Consolidated Balance Sheets, and are expensed as incurred. Generally, our lease agreements do not contain any residual value guarantees or restrictive covenants.

All real estate leases and equipment leases, with an initial term greater than 12 months, result in the recognition of a right of use asset and lease liability recognized on our Consolidated Balance Sheets. Certain equipment leases with a term less than 12 months do not result in the recognition of right of use assets or lease liabilities. We recognize lease expense for those leases, which are not material, on a straight-line basis over the lease term.

We sublease certain real estate to third parties. In the second quarter of 2020, sublease income earned was not material to our Consolidated Statements of Operations.

We generally combine fixed lease and non-lease components for those leases we have entered into or reassessed after the adoption of the new lease standard. These assets primarily include real estate, manufacturing equipment and vehicles. The implicit rate of the majority of our leases is not known; therefore we use our incremental borrowing rate in determining the present value of lease payments. For leases denominated in a foreign currency, the incremental borrowing rate is adjusted by replacing the U.S. credit-free spread with that of the specific country.

In the second quarter and first half of 2020, we incurred operating lease costs recorded in Costs of products sold of $2 million and $4 million, respectively. In the second quarter and first half of 2020, we incurred operating lease costs recorded in SG&A expenses of $6 million and $12 million, respectively. These charges were recognized in our Consolidated Statements of Operations. Finance lease costs were not material to our Consolidated Statements of Operations.

The following table presents balance sheet information related to operating leases:

(in millions)	As of April 30, 2020
Operating lease right of use assets	$	121
Finance lease right of use assets(A)	2
Total right of use assets	$	123
Operating lease liabilities
Other current liabilities	$	30
Other noncurrent liabilities	94
Finance lease liabilities
Notes payable and current maturities of long-term debt	1
Long-term debt	1
Total lease liabilities	$	126

_________________________

(A) Finance lease right of use assets are included in Property and Equipment, net on our Consolidated Balance Sheets.

The following table presents maturities of lease liabilities:

	As of April 30, 2020
(in millions)	Finance Leases		Operating Leases
Remainder of 2020	$	—	$	17
2021	1		33
2022	1		25
2023	—		20
2024	—		13
Thereafter	—		32
Total lease payments	2		140
Less: Present value discount	—		16
Total lease liabilities	$	2	$	124

The following table presents future minimum lease payments:

	As of October 31, 2019
(in millions)	Capital Lease Obligations		Operating Leases
2020	$	1	$	37
2021	1		28
2022	—		22
2023	—		18
2024	—		13
Thereafter	—		31
Total future minimum lease payments	$	2	$	149

The following table presents cash flow information related to leases:

(in millions)	Three Months Ended April 30, 2020		Six Months Ended April 30, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	10	$	19
Right of use assets obtained in exchange for lease liabilities
Operating leases	$	24	$	28

The following table presents the weighted-average remaining lease term and discount rate:

	As of April 30, 2020
	Finance Leases		Operating Leases
Weighted-average remaining lease term	9.0 years		5.7 years
Weighted-average discount rate	5.9	%	4.3	%

Lessor

We primarily lease trucks, tractors, and trailers to retail customers and dealers in the U.S. and Mexico through our Financial Services segment. These leases are classified as either operating or finance leases, expire at various dates, and typically have terms which allow an extension or fair value options to purchase the asset at the end of the lease term. The terms of leases generally range from 2 to 7 years, though extension periods may be for a shorter time. Our Financial Services segment manages the relationship with Navistar Capital (a program of BMO Harris Bank N.A. and Bank of Montreal (together, “BMO”)). Navistar Capital is our third-party preferred source of retail and lease customer financing for equipment offered by us and our dealers in the U.S.  For certain Navistar Capital financed contracts which contain an end of term option for us to purchase the leased equipment if the customer declines to do so, we recognize the equipment subject to an operating lease as an asset on our Consolidated Balance Sheets.  For more information related to the BMO arrangement, see Note 12, Commitments and Contingencies. We have also leased certain real estate to third parties to manage excess capacity through our Corporate segment.

We depreciate trucks, tractors, and trailers leased to customers under operating lease agreements on a straight-line basis to the equipment's estimated residual value over the lease term. The residual values of the equipment leased under operating lease agreements represent estimates of the value of the assets at the end of the lease contracts and are initially recorded based on estimates of future market values. Realization of the residual values is dependent on our future ability to market the equipment. We work with our customers and dealers to manage the sale of lease returns and the recovery of residual exposure. We also review residual values periodically to determine that recorded amounts are appropriate and the equipment is not impaired. For more information on key inputs and valuation methodologies in evaluating impairment of assets under operating lease agreements, see Note 11, Fair Value Measurements. For more information regarding impaired finance receivables see Note 5, Allowance for Doubtful Accounts, and Note 3, Restructuring, Impairments and Divestitures for impaired assets under operating leases.

The following table presents revenue from finance and operating leases, included in our Consolidated Statement of Operations:

	Three Months Ended April 30, 2020				Six Months Ended April 30, 2020
(in millions)	Finance Leases(A)		Operating Leases		Finance Leases(A)		Operating Leases
Sales of manufactured products, net	$	—	$	4	$	—	$	12
Finance revenues	11		22		18		41
Other expense, net	—		2		—		3
Total lease revenue	$	11	$	28	$	18	$	56

_______________________

(A) Finance revenues consist primarily of interest income. Additional fees, such as late fees, are not material to our consolidated financial statements.

The following table presents the carrying amount of equipment leased to others, included in Property Plant and Equipment, net in our Consolidated Balance Sheets:

(in millions)	April 30, 2020		October 31, 2019
Equipment leased to others, at original cost	$	484	$	562
Less: Accumulated depreciation	118		125
Equipment leased to others, net	$	366	$	437

The following table presents payments due from operating leases:

(in millions)	April 30, 2020
Remainder of 2020	$	64
2021	81
2022	71
2023	52
2024	31
Thereafter	43
Total	$	342

The following table presents maturities of finance lease receivables reconciled to the net investment in finance leases:

(in millions)	April 30, 2020
Remainder of 2020	$	74
2021	62
2022	44
2023	22
2024	9
Thereafter	2
Total	213
Less: Unearned interest income	43
Net investment in finance leases	$	170

Operating and finance lease contracts generally may be repaid or refinanced prior to contractual maturity. Accordingly, this presentation should not be regarded as a forecast of future cash.

Lessee, Operating Leases [Text Block]

Leases

We account for a lease when an asset has been identified and when the contract conveys the right to control the use of the identified asset in exchange for consideration for a period of time. We determine whether an arrangement is or contains a lease at inception.

Lessee

We lease certain land, buildings, and equipment under operating and finance leases for our distribution centers, manufacturing facilities and our corporate offices, expiring at various dates through 2030. Operating leases generally have 1 to 20 year terms, with options to extend the lease. Terms are generally negotiated at the time of renewal. Options to terminate are not common and may be included at the discretion of the lessor. Certain leases may include provisions for rent escalation based on actual costs incurred by the lessor. Variable lease payments, which are not material, are not included as right of use assets or lease liabilities in our Consolidated Balance Sheets, and are expensed as incurred. Generally, our lease agreements do not contain any residual value guarantees or restrictive covenants.

All real estate leases and equipment leases, with an initial term greater than 12 months, result in the recognition of a right of use asset and lease liability recognized on our Consolidated Balance Sheets. Certain equipment leases with a term less than 12 months do not result in the recognition of right of use assets or lease liabilities. We recognize lease expense for those leases, which are not material, on a straight-line basis over the lease term.

We sublease certain real estate to third parties. In the second quarter of 2020, sublease income earned was not material to our Consolidated Statements of Operations.

We generally combine fixed lease and non-lease components for those leases we have entered into or reassessed after the adoption of the new lease standard. These assets primarily include real estate, manufacturing equipment and vehicles. The implicit rate of the majority of our leases is not known; therefore we use our incremental borrowing rate in determining the present value of lease payments. For leases denominated in a foreign currency, the incremental borrowing rate is adjusted by replacing the U.S. credit-free spread with that of the specific country.

In the second quarter and first half of 2020, we incurred operating lease costs recorded in Costs of products sold of $2 million and $4 million, respectively. In the second quarter and first half of 2020, we incurred operating lease costs recorded in SG&A expenses of $6 million and $12 million, respectively. These charges were recognized in our Consolidated Statements of Operations. Finance lease costs were not material to our Consolidated Statements of Operations.

The following table presents balance sheet information related to operating leases:

(in millions)	As of April 30, 2020
Operating lease right of use assets	$	121
Finance lease right of use assets(A)	2
Total right of use assets	$	123
Operating lease liabilities
Other current liabilities	$	30
Other noncurrent liabilities	94
Finance lease liabilities
Notes payable and current maturities of long-term debt	1
Long-term debt	1
Total lease liabilities	$	126

_________________________

(A) Finance lease right of use assets are included in Property and Equipment, net on our Consolidated Balance Sheets.

The following table presents maturities of lease liabilities:

	As of April 30, 2020
(in millions)	Finance Leases		Operating Leases
Remainder of 2020	$	—	$	17
2021	1		33
2022	1		25
2023	—		20
2024	—		13
Thereafter	—		32
Total lease payments	2		140
Less: Present value discount	—		16
Total lease liabilities	$	2	$	124

The following table presents future minimum lease payments:

	As of October 31, 2019
(in millions)	Capital Lease Obligations		Operating Leases
2020	$	1	$	37
2021	1		28
2022	—		22
2023	—		18
2024	—		13
Thereafter	—		31
Total future minimum lease payments	$	2	$	149

The following table presents cash flow information related to leases:

(in millions)	Three Months Ended April 30, 2020		Six Months Ended April 30, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	10	$	19
Right of use assets obtained in exchange for lease liabilities
Operating leases	$	24	$	28

The following table presents the weighted-average remaining lease term and discount rate:

	As of April 30, 2020
	Finance Leases		Operating Leases
Weighted-average remaining lease term	9.0 years		5.7 years
Weighted-average discount rate	5.9	%	4.3	%

Lessor

We primarily lease trucks, tractors, and trailers to retail customers and dealers in the U.S. and Mexico through our Financial Services segment. These leases are classified as either operating or finance leases, expire at various dates, and typically have terms which allow an extension or fair value options to purchase the asset at the end of the lease term. The terms of leases generally range from 2 to 7 years, though extension periods may be for a shorter time. Our Financial Services segment manages the relationship with Navistar Capital (a program of BMO Harris Bank N.A. and Bank of Montreal (together, “BMO”)). Navistar Capital is our third-party preferred source of retail and lease customer financing for equipment offered by us and our dealers in the U.S.  For certain Navistar Capital financed contracts which contain an end of term option for us to purchase the leased equipment if the customer declines to do so, we recognize the equipment subject to an operating lease as an asset on our Consolidated Balance Sheets.  For more information related to the BMO arrangement, see Note 12, Commitments and Contingencies. We have also leased certain real estate to third parties to manage excess capacity through our Corporate segment.

We depreciate trucks, tractors, and trailers leased to customers under operating lease agreements on a straight-line basis to the equipment's estimated residual value over the lease term. The residual values of the equipment leased under operating lease agreements represent estimates of the value of the assets at the end of the lease contracts and are initially recorded based on estimates of future market values. Realization of the residual values is dependent on our future ability to market the equipment. We work with our customers and dealers to manage the sale of lease returns and the recovery of residual exposure. We also review residual values periodically to determine that recorded amounts are appropriate and the equipment is not impaired. For more information on key inputs and valuation methodologies in evaluating impairment of assets under operating lease agreements, see Note 11, Fair Value Measurements. For more information regarding impaired finance receivables see Note 5, Allowance for Doubtful Accounts, and Note 3, Restructuring, Impairments and Divestitures for impaired assets under operating leases.

The following table presents revenue from finance and operating leases, included in our Consolidated Statement of Operations:

	Three Months Ended April 30, 2020				Six Months Ended April 30, 2020
(in millions)	Finance Leases(A)		Operating Leases		Finance Leases(A)		Operating Leases
Sales of manufactured products, net	$	—	$	4	$	—	$	12
Finance revenues	11		22		18		41
Other expense, net	—		2		—		3
Total lease revenue	$	11	$	28	$	18	$	56

_______________________

(A) Finance revenues consist primarily of interest income. Additional fees, such as late fees, are not material to our consolidated financial statements.

The following table presents the carrying amount of equipment leased to others, included in Property Plant and Equipment, net in our Consolidated Balance Sheets:

(in millions)	April 30, 2020		October 31, 2019
Equipment leased to others, at original cost	$	484	$	562
Less: Accumulated depreciation	118		125
Equipment leased to others, net	$	366	$	437

The following table presents payments due from operating leases:

(in millions)	April 30, 2020
Remainder of 2020	$	64
2021	81
2022	71
2023	52
2024	31
Thereafter	43
Total	$	342

The following table presents maturities of finance lease receivables reconciled to the net investment in finance leases:

(in millions)	April 30, 2020
Remainder of 2020	$	74
2021	62
2022	44
2023	22
2024	9
Thereafter	2
Total	213
Less: Unearned interest income	43
Net investment in finance leases	$	170

Operating and finance lease contracts generally may be repaid or refinanced prior to contractual maturity. Accordingly, this presentation should not be regarded as a forecast of future cash.