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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Apr. 30, 2021

Organization and Description of the Business

Organization and Description of the BusinessNavistar 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").

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, 2020, 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 $29 million and $37 million, and liabilities of $2 million and $3 million, as of April 30, 2021 and October 31, 2020, respectively. As of April 30, 2021 and October 31, 2020, assets include $3 million and $4 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 $996 million and $661 million as of April 30, 2021 and October 31, 2020, respectively, and liabilities of $885 million and $610 million as of April 30, 2021 and October 31, 2020, 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 $377 million and $397 million as of April 30, 2021 and October 31, 2020, respectively, and corresponding liabilities of $253 million and $288 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.

We also have an interest in other VIEs, which we do not consolidate because we are not the primary beneficiary. Our financial support and maximum loss exposure relating to these non-consolidated VIEs are not material to our financial condition, results of operations, or cash flows.

We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability to exercise significant influence over operating and financial policies. Equity in income (loss) of non-consolidated affiliates includes our share of the net income (loss) of these entities.

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 $79 million at April 30, 2021, compared to $135 million at October 31, 2020, offset by reserves of $13 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 finance lease obligations at 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. It is reasonably possible that within the next twelve months we could recognize additional impairment charges for certain trucks under operating leases where Navistar is a lessor, which could be material, if we experience continued declines in excess of our forecasted expected residual values, as a result of the COVID-19 pandemic, the demand for used trucks or a change in the mix of sales through various market channels.

Equity Investments

We have equity security investments which are included in Other noncurrent assets on the Consolidated Balance Sheets. These investments are accounted for in accordance with ASC 321, Investments – Equity Securities. We elect the measurement alternative for equity security investments without a readily determinable fair value. Changes in the fair values of the investments are recorded in Other (income) expense, net on the Consolidated Statements of Operations. One of our equity security investments has a readily determinable fair value based on quoted market prices, which makes this a Level 1 fair value instrument and had a fair value of $386 million at April 30, 2021. During the six months ended April 30, 2021, we recognized $246 million as an increase to the fair value of our equity security investments, included in our Consolidated Balance Sheet in other noncurrent assets. The fair value for all equity security investments at April 30, 2021 was $394 million.

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 credit losses, 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 April 30, 2021, approximately 8,400, 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).

Due to disruptions in our supply chain resulting from residual COVID-19 impacts, which have been exacerbated by various events, our global manufacturing activities at certain of our production facilities have been impacted. Some of our suppliers are the sole source for a supply item (e.g., the majority of engines, parts and manufactured components) and cannot be quickly or inexpensively re-sourced to another supplier due to long design and validation lead times or proprietary product functionality. We continue to monitor our supply chain and work with suppliers and our cross functional team to develop mitigation strategies as the industry manages the impacts of supply chain disruptions.

Recently Adopted and Issued Accounting Standards

Recently Adopted Accounting Standards

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. The impact of this ASU on our consolidated financial statements primarily resulted from our Financial Services operations and certain financial guarantees.

We measure expected credit losses differently depending on the type of receivable or credit exposure. To measure expected credit losses on our finance receivables we use recent historical loss data, then we apply a forward-looking adjustment based on internal and external forecasts of the relevant unemployment rate and real GDP. The forward-looking adjustment is determined using the relationship between these economic indicators and our historical loss data. The forward-looking adjustment is applied to the first two years of the amortizing receivables balances, after which the estimate reverts to the historical loss rate on a one-year straight-line basis throughout the full remaining amortization period of the receivables. We have determined that two years is a reasonable and supportable forecast period. Additionally, we may make further quantitative or qualitative adjustments to the above models if we determine that the result is not representative of the expected credit loss after assessing the current condition of the credit environment. Our wholesale notes and accounts receivable, retail accounts, trade accounts and other receivables are short term in nature and do not have a measurable pattern of historical losses; therefore, we use the average loss per occurrence, based on historical losses, if any. Expected credit losses are recorded as an allowance for credit losses and netted against finance or trade receivables on the balance sheet through a charge to Selling, general and administrative expenses.

When we identify the receivables of significant customers as impaired, we segregate those customers’ receivables and specifically measure the expected credit loss based primarily on the market value of the collateral, less remarketing costs. We use our used truck inventory values in estimating the market value of collateral.

We measure the expected credit loss of our off-balance sheet financial guarantees using the same model as our finance receivables including the application of the two-year reasonable and supportable forecast period and the reversion to historical loss data. A guarantee reserve is established in Other current liabilities through a charge to Sales of manufactured products, net. See Note 11, Fair Value Measurements, and Note 12, Commitments and Contingencies, for more information on our financial guarantees.

The adoption of ASU No. 2016-13 includes new disclosures which can be found in Note 5, Allowance for Credit Losses, which was previously referred to as Allowance for Doubtful Accounts. See Note 5 for a beginning balance reconciliation from Allowance for Doubtful Accounts.

We adopted this ASU using a modified retrospective transition on November 1, 2020. The comparative information has not been restated and continues to be reported under the accounting standard in effect for those periods. The cumulative effects of the adjustment made to our November 1, 2020 Consolidated Balance Sheet for the adoption of the new credit loss standard were as follows:


(in millions)	Balance at October 31, 2020		Change Due to New Standard		Balance at November 1, 2020
ASSETS
Current assets
Finance receivables, net	$	1,371	$	(3)	$	1,368

Total current assets	4,577		(3)		4,574
Finance receivables, net	251		(4)		247
Trade and other receivables, net	7		(1)		6
Deferred taxes, net	117		2		119
Total assets	$	6,637	$	(6)	$	6,631
LIABILITIES and STOCKHOLDERS' DEFICIT
Liabilities
Current liabilities
Other current liabilities	$	1,453	$	1	$	1,454
Total current liabilities	3,371		1		3,372
Total liabilities	10,459		1		10,460
Stockholders' deficit
Total stockholders' deficit attributable to Navistar International Corporation	(3,826)		(7)		(3,833)
Total liabilities and stockholders' deficit	$	6,637	$	(6)	$	6,631

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 year 2022, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.