NAV 2014 Q1
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-Q
___________________________________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2014

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
___________________________________________________
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 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 February 28, 2014, the number of shares outstanding of the registrant’s common stock was 81,288,845, net of treasury shares.
 
 
 
 
 


Table of Contents

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
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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, and markets for our products;
•
anticipated performance and benefits of our products and technologies, including our advanced clean engine solutions;
•
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 expectations to achieve the objectives of our "Drive-to-Deliver" turnaround plan, including: (i) leading vehicle uptime, (ii) creating a lean enterprise, (iii) generating future financial growth, and (iv) improving market share profitably;
•
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 dissolution of our Blue Diamond Truck joint venture with Ford Motor Company ("Ford") expected in February 2015;
•
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 anticipated costs relating to the development of our emissions solutions products and other product modifications that may be required to meet other federal, state, and foreign regulatory requirements;
•
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.
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, included within our Annual Report on Form 10-K for the year ended October 31, 2013, which was filed on December 20, 2013, as well as those 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.

3
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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 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. 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
Table of Contents

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)
2014
 
2013
Sales and revenues
 
 
 
Sales of manufactured products, net
$
2,169

 
$
2,598

Finance revenues
39

 
39

Sales and revenues, net
2,208

 
2,637

Costs and expenses
 
 
 
Costs of products sold
2,014

 
2,286

Restructuring charges
3

 
2

Asset impairment charges
18

 
—

Selling, general and administrative expenses
239

 
285

Engineering and product development costs
90

 
111

Interest expense
82

 
74

Other expense (income), net
14

 
(38
)
Total costs and expenses
2,460

 
2,720

Equity in loss of non-consolidated affiliates
—

 
(1
)
Loss from continuing operations before income taxes
(252
)
 
(84
)
Income tax benefit (expense)
12

 
(15
)
Loss from continuing operations
(240
)
 
(99
)
Income (loss) from discontinued operations, net of tax
1

 
(9
)
Net loss
(239
)
 
(108
)
Less: Net income attributable to non-controlling interests
9

 
15

Net loss attributable to Navistar International Corporation
$
(248
)
 
$
(123
)
 
 
 
 
Amounts attributable to Navistar International Corporation common shareholders:
 
 
 
Loss from continuing operations, net of tax
$
(249
)
 
$
(114
)
Income (loss) from discontinued operations, net of tax
1

 
(9
)
Net loss
$
(248
)
 
$
(123
)
 
 
 
 
Earnings (loss) per share:
 
 
 
Basic:
 
 
 
Continuing operations
$
(3.07
)
 
$
(1.42
)
Discontinued operations
0.02

 
(0.11
)
 
$
(3.05
)
 
$
(1.53
)
 
 
 
 
Diluted:
 
 
 
Continuing operations
$
(3.07
)
 
$
(1.42
)
Discontinued operations
0.02

 
(0.11
)
 
$
(3.05
)
 
$
(1.53
)
 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
81.2

 
80.2

Diluted
81.2

 
80.2



See Notes to Condensed Consolidated Financial Statements
5
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Navistar International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Loss 
(Unaudited)
(in millions)
Three Months Ended January 31,
2014
 
2013
Net loss attributable to Navistar International Corporation
$
(248
)
 
$
(123
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
(62
)
 
17

Defined benefit plans, net of tax of $0 in both periods
25

 
38

Total other comprehensive income (loss)
(37
)
 
55

Total comprehensive loss attributable to Navistar International Corporation
$
(285
)
 
$
(68
)

See Notes to Condensed Consolidated Financial Statements
6
Table of Contents

Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
 
January 31,
 
October 31,
(in millions, except per share data)
2014
 
2013
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
549

 
$
755

Marketable securities
630

 
830

Trade and other receivables, net
553

 
737

Finance receivables, net
1,461

 
1,597

Inventories
1,382

 
1,210

Deferred taxes, net
74

 
72

Other current assets
249

 
258

Total current assets
4,898

 
5,459

Restricted cash
115

 
91

Trade and other receivables, net
28

 
29

Finance receivables, net
303

 
338

Investments in non-consolidated affiliates
75

 
77

Property and equipment (net of accumulated depreciation and amortization of $2,465 and $2,440, respectively)
1,700

 
1,741

Goodwill
170

 
184

Intangible assets (net of accumulated amortization of $100 and $97, respectively)
112

 
138

Deferred taxes, net
155

 
159

Other noncurrent assets
98

 
99

Total assets
$
7,654

 
$
8,315

LIABILITIES and STOCKHOLDERS’ DEFICIT
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
1,259

 
$
1,163

Accounts payable
1,430

 
1,502

Other current liabilities
1,564

 
1,596

Total current liabilities
4,253

 
4,261

Long-term debt
3,605

 
3,922

Postretirement benefits liabilities
2,531

 
2,564

Deferred taxes, net
25

 
33

Other noncurrent liabilities
1,117

 
1,136

Total liabilities
11,531

 
11,916

Redeemable equity securities
2

 
4

Stockholders’ deficit
 
 
 
Series D convertible junior preference stock
3

 
3

Common stock (86.8 shares issued, $0.10 par value per share and 220 shares authorized, all at both dates)
9

 
9

Additional paid in capital
2,478

 
2,477

Accumulated deficit
(4,311
)
 
(4,063
)
Accumulated other comprehensive loss
(1,861
)
 
(1,824
)
Common stock held in treasury, at cost (5.6 and 6.3 shares, respectively)
(230
)
 
(251
)
Total stockholders’ deficit attributable to Navistar International Corporation
(3,912
)
 
(3,649
)
Stockholders’ equity attributable to non-controlling interests
33

 
44

Total stockholders’ deficit
(3,879
)
 
(3,605
)
Total liabilities and stockholders’ deficit
$
7,654

 
$
8,315


See Notes to Condensed Consolidated Financial Statements
7
Table of Contents

Navistar International Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended January 31,
(in millions)
2014
 
2013
Cash flows from operating activities
 
 
 
Net loss
$
(239
)
 
$
(108
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
55

 
89

Depreciation of equipment leased to others
31

 
11

Deferred taxes, including change in valuation allowance
(18
)
 
(9
)
Asset impairment charges
18

 
—

Amortization of debt issuance costs and discount
14

 
16

Stock-based compensation
5

 
5

Provision for doubtful accounts, net of recoveries
2

 
1

Equity in loss of non-consolidated affiliates, net of dividends
2

 
3

Other non-cash operating activities
(9
)
 
—

Changes in other assets and liabilities, exclusive of the effects of businesses acquired and disposed
46

 
58

Net cash provided by (used in) operating activities
(93
)
 
66

Cash flows from investing activities
 
 


Purchases of marketable securities
(378
)
 
(482
)
Sales or maturities of marketable securities
578

 
177

Net change in restricted cash and cash equivalents
(24
)
 
59

Capital expenditures
(21
)
 
(72
)
Purchases of equipment leased to others
(49
)
 
(32
)
Proceeds from sales of property and equipment
10

 
3

Investments in non-consolidated affiliates
(2
)
 
—

Net cash provided by (used in) investing activities
114

 
(347
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt
82

 
—

Principal payments on securitized debt
(94
)
 
(190
)
Proceeds from issuance of non-securitized debt
47

 
25

Principal payments on non-securitized debt
(53
)
 
(60
)
Net decrease in notes and debt outstanding under revolving credit facilities
(197
)
 
(32
)
Principal payments under financing arrangements and capital lease obligations
(4
)
 
(47
)
Debt issuance costs
(3
)
 
(1
)
Proceeds from financed lease obligations
20

 
—

Issuance of common stock
—

 
14

Proceeds from exercise of stock options
16

 
1

Dividends paid by subsidiaries to non-controlling interest
(20
)
 
(13
)
Net cash used in financing activities
(206
)
 
(303
)
Effect of exchange rate changes on cash and cash equivalents
(21
)
 
(6
)
Decrease in cash and cash equivalents
(206
)
 
(590
)
Cash and cash equivalents at beginning of the period
755

 
1,087

Cash and cash equivalents at end of the period
$
549

 
$
497


See Notes to Condensed Consolidated Financial Statements
8
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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, 2013
$
3

 
$
9

 
$
2,477

 
$
(4,063
)
 
$
(1,824
)
 
$
(251
)
 
$
44

 
$
(3,605
)
Net income (loss)
 
 
 
 
 
 
(248
)
 
 
 
 
 
9

 
(239
)
Total other comprehensive loss
 
 
 
 
 
 
 
 
(37
)
 
 
 
 
 
(37
)
Transfer from redeemable equity securities upon exercise or expiration of stock options
 
 
 
 
2

 
 
 
 
 
 
 
 
 
2

Stock-based compensation
 
 
 
 
4

 
 
 
 
 
 
 
 
 
4

Stock ownership programs
 
 
 
 
(5
)
 
 
 
 
 
21

 
 
 
16

Cash dividends paid to non-controlling interest
 
 
 
 
 
 
 
 
 
 
 
 
(20
)
 
(20
)
Balance as of January 31, 2014
$
3

 
$
9

 
$
2,478

 
$
(4,311
)
 
$
(1,861
)
 
$
(230
)
 
$
33

 
$
(3,879
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of October 31, 2012
$
3

 
$
9

 
$
2,440

 
$
(3,165
)
 
$
(2,325
)
 
$
(272
)
 
$
45

 
$
(3,265
)
Net income (loss)
 
 
 
 
 
 
(123
)
 
 
 
 
 
15

 
(108
)
Total other comprehensive income
 
 
 
 
 
 
 
 
55

 
 
 
 
 
55

Transfer from redeemable equity securities upon exercise or expiration of stock options
 
 
 
 
1

 
 
 
 
 
 
 
 
 
1

Stock-based compensation
 
 
 
 
3

 
 
 
 
 
 
 
 
 
3

Stock ownership programs
 
 
 
 
(5
)
 
 
 
 
 
5

 
 
 
—

Cash dividends paid to non-controlling interest
 
 
 
 
 
 
 
 
 
 
 
 
(13
)
 
(13
)
October 2012 issuance of common stock, net of issuance cost and fees
 
 
 
 
14

 
 
 
 
 
 
 
 
 
14

Other
 
 
 
 
 
 
 
 
1

 
 
 
(1
)
 
—

Balance as of January 31, 2013
$
3

 
$
9

 
$
2,453

 
$
(3,288
)
 
$
(2,269
)
 
$
(267
)
 
$
46

 
$
(3,313
)

See Notes to Condensed Consolidated Financial Statements
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Table of Contents

Navistar International Corporation and Subsidiaries
Notes to Condensed 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. 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.
Our fiscal year ends October 31. As such, all references to 2014 and 2013 contained within this Quarterly Report on Form 10-Q relate to our fiscal year, unless otherwise indicated.
We operate in four principal industry segments: North America Truck, North America 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.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our Manufacturing operations, which include majority-owned dealers ("Dealcors"), 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.
Certain reclassifications were made to prior periods' amounts to conform to the 2014 presentation, which relates to the realignment of our reporting segments that became effective during the fourth quarter of 2013.
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, 2013, 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 the VIE's economic performance and have the obligation to absorb losses of the VIE that could potentially be significant to the VIE 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 ("BDP") and Blue Diamond Truck ("BDT") joint ventures with Ford Motor Company ("Ford"). As a result, our Consolidated Balance Sheets include assets of $201 million and $323 million and liabilities of $186 million and $188 million as of January 31, 2014 and October 31, 2013, respectively, from BDP and BDT, including $65 million and $56 million of cash and cash equivalents, at the respective dates, which are not readily available to satisfy claims against our general assets. The creditors of BDP and BDT do not have recourse to our general credit. In December 2011, Ford notified the Company of its intention to dissolve the BDT joint venture effective December 2014. In September 2013, we agreed with Ford to extend the BDT joint venture through February 2015. We do not expect the dissolution of the BDT joint venture to have a material impact on our consolidated financial statements.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include assets of $946 million and $989 million as of January 31, 2014 and October 31, 2013, respectively, and liabilities of $752 million and $778 million as of January 31, 2014 and October 31, 2013, respectively, all of which are involved in securitizations that are treated as

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

asset-backed debt. In addition, our Consolidated Balance Sheets include assets of $73 million and $61 million and corresponding liabilities of $58 million and $49 million as of January 31, 2014 and October 31, 2013, respectively, 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 trusts 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 loss (income) of non-consolidated affiliates includes our share of the net income (loss) of these entities.
Product Warranty Liability
The following table presents accrued product warranty and deferred warranty revenue activity:
 
Three Months Ended January 31,
(in millions)
2014
 
2013
Balance at beginning of period
$
1,349

 
$
1,118

Costs accrued and revenues deferred
71

 
111

Currency translation adjustment
(2
)
 
—

Adjustments to pre-existing warranties(A)(B)
52

 
40

Payments and revenues recognized
(132
)
 
(161
)
Balance at end of period
1,338

 
1,108

Less: Current portion
602

 
559

Noncurrent accrued product warranty and deferred warranty revenue
$
736

 
$
549

_________________________
(A)
Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior 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.
In the first quarter of 2014, we recorded adjustments for changes in estimates of $52 million or $0.64 per diluted share. In the first quarter of 2013, we recorded adjustments for changes in estimates of $40 million or $0.50 per diluted share. The impact of income taxes on the 2014 and 2013 adjustments is not material due to our deferred tax valuation allowances on our U.S. deferred tax assets
(B)
In the first quarter of 2013, we recognized $13 million of charges for adjustments to pre-existing warranties for a specific warranty issue related to component parts from a supplier. Also during the first quarter of 2013, we reached agreement for reimbursement from this supplier for this amount and other costs previously accrued. As a result of this agreement, we recognized a recovery of $27 million within Costs of products sold and recorded a receivable within Other current assets.
Extended Warranty Programs
The amount of deferred revenue related to extended warranty programs was $427 million and $420 million at January 31, 2014 and October 31, 2013 respectively. Revenue recognized under our extended warranty programs was $27 million and $29 million in the three months ended January 31, 2014 and 2013, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("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, income tax contingency accruals and valuation allowances, product warranty accruals, asbestos and other product liability accruals, asset impairment charges, and litigation-related accruals. Actual results could differ from our estimates.

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

Concentration Risks
Our financial condition, results of operations, and cash flows are subject to concentration risks related to concentrations of our union employees. As of January 31, 2014, approximately 5,700, or 64%, of our hourly workers and approximately 400, or 6%, of our salaried workers are represented by labor unions and are covered by collective bargaining agreements. Our current master collective bargaining agreement with the UAW will expire in October 2014. Our future operations may be affected by changes in governmental procurement policies, budget considerations, changing national defense requirements, and global, political, regulatory and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).
Goodwill
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to the net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or more frequently, if circumstances change or an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Qualitative factors may be assessed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the qualitative assessment indicates that the carrying amount is more likely than not higher than the fair value, goodwill is tested for impairment based on a two-step test. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The income approach is based on discounted cash flows which are derived from internal forecasts and economic expectations for each respective reporting unit.
We have a goodwill balance of $170 million as of January 31, 2014.  During the first quarter of 2014, a Brazilian reporting unit with goodwill of $132 million experienced declines in actual and forecasted results and cash flow. As a result of these factors as well as slower than expected growth in the Brazilian economy and a weakening of the Brazilian currency, we performed an impairment analysis in the first quarter. The income approach which is based on discounted cash flows which are derived from internal forecasts and economic expectations was used in the impairment analysis of the reporting unit. As a result of the goodwill impairment analysis, we determined that the goodwill was not impaired and that the fair value of the reporting unit exceeded its carrying amount by less than 10%.
It is reasonably possible that within the next twelve months, we could recognize goodwill or other impairment charges, which could be material, if among other things, we experience adverse changes in our business including declines in profitability due to changes in volume, market pricing, cost, or the business environment.
Recently Issued and Adopted Accounting Standards
There are no recently issued accounting standards for which the Company expects a material impact on our financial statements. In addition, for the three months ended January 31, 2014, the Company has not adopted any new accounting guidance that has had a material impact on our consolidated financial statements.
2. Discontinued Operations and Other Divestitures
The Company is currently evaluating its portfolio of assets 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 Return on Invested Capital ("ROIC") methodology, combined with an assessment of the strategic fit to our core business, to identify areas that are under-performing. For those areas under-performing, we are evaluating whether to fix, divest, or close, and expect to realize incremental benefits from these actions in the near future.
Discontinued Operations
In the first quarter of 2013, the Company completed the idling of the Workhorse Custom Chassis ("WCC") operations, and in the second quarter of 2013, we completed the divestiture of the WCC business for an immaterial amount. The operating results

12
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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

of the WCC operations are reported as discontinued operations in the Consolidated Statements of Operations for all periods presented.
Also in the first quarter of 2013, certain operations of the Monaco recreational vehicle ("RV") business ("Monaco") were determined to be held-for-sale. In May 2013, we divested substantially all of our interest in these operations of Monaco. The operating results of these operations of Monaco are reported as discontinued operations in the Consolidated Statements of Operations for all periods presented. The cash consideration from the divestiture was $19 million. As a result of the divestiture, we impaired certain assets and recognized a loss totaling $24 million.
WCC and Monaco were not material to the Company's Consolidated Balance Sheets or Condensed Consolidated Statements of Cash Flows and have not been reclassified in the respective financial statements.
The following table summarizes the discontinued operations activity in the Company's Consolidated Statements of Operations:
 
Three months ended January 31,
(in millions)
2014
 
2013
Sales and revenues, net
$
—

 
$
34

 
 
 
 
Income (loss) before income taxes
$
1

 
$
(9
)
Income tax benefit (expense)
—

 
—

Income (loss) from discontinued operations, net of tax
$
1

 
$
(9
)
We generally use a centralized approach to cash management, financing of our Manufacturing operations, and general corporate related functions, and, accordingly, do not allocate debt, interest expense, or corporate overhead to our discontinued businesses. Any debt and related interest expense of a specific entity within a business is recorded by the respective entity.
Other Divestitures
Mahindra Joint Ventures
In 2006 and 2008, we formed two joint ventures with Mahindra & Mahindra Ltd. ("Mahindra") in India, which operated under the names of Mahindra Navistar Automotives Ltd. ("MNAL") and Mahindra-Navistar Engines Private Ltd. ("MNEPL") (collectively, the "Mahindra Joint Ventures"). In February 2013, the Company sold its stake in the Mahindra Joint Ventures to Mahindra for $33 million. As a result of the divestiture, the Global Operations segment recognized a gain of $26 million in 2013. As part of the transaction, the Company entered into licensing and service agreements with Mahindra.
3. Restructurings and Impairments
Restructuring charges are recorded on restructuring plans that have been committed to by management and are, in part, based upon management's best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities. In the three months ended January 31, 2014 and 2013, the Company recognized Restructuring charges of $3 million and $2 million, respectively. In the three months ended January 31, 2014, the Company recognized Asset impairment charges of $18 million.
Cost-Reductions and Other Strategic Initiatives
From time to time, we announced actions to control spending across the Company with targeted reductions of certain costs. We are focused on continued reductions in discretionary spending, including but not limited to reductions from efficiencies, and prioritizing or eliminating certain programs or projects.
We continue to focus on improving our core North America Truck and Parts businesses. We 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. The Company is currently evaluating its portfolio of assets to validate their strategic and financial fit. To allow us to increase our focus on our North America core businesses, we are evaluating product lines, businesses, and engineering programs that fall outside of our core businesses. We are using ROIC, combined with an assessment of the strategic fit to our core businesses, to identify areas that are not performing to our expectations. For those areas, we are evaluating whether to fix, divest, or close. These actions could result in additional restructuring and other related charges in the future, including but not limited to; (i) impairments, (ii) costs for employee and contractor termination and other related benefits, and (iii) charges for pension and other postretirement contractual benefits and pension curtailments. These charges could be significant.

13
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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

As a 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, the North America Truck segment recognized certain charges, which included (i) accelerated depreciation of certain assets of $13 million in the first quarter of 2013, which impacted Cost of products sold in the Company's Consolidated Statements of Operations, and (ii) asset impairments of $17 million in the third quarter of 2013.
In the first quarter of 2014, the Company concluded it had a triggering event related to potential sales of assets requiring assessment of impairment for certain intangible and long-lived assets in the North America Truck segment. As a result, certain amortizing intangible assets and long-lived assets were determined to be fully impaired, resulting in an impairment charge of $18 million that was recognized in Asset impairment charges in the Company's Consolidated Statements of Operations. For more information, see Note 10, Fair value measurements.
Voluntary separation program and reduction-in-force actions
In the fourth quarter of 2012, the Company offered the majority of our U.S.-based non-represented salaried employees the opportunity to apply for a voluntary separation program ("VSP"). Along with the employees who chose to participate in 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.
In the fourth quarter of 2013, the Company leveraged efficiencies identified through redesigning our organizational structure and began implementing new cost-reduction initiatives, including an enterprise-wide reduction-in-force. As a result of these actions, the Company recognized restructuring charges of $11 million in personnel costs for employee termination and related benefits, of which a portion was paid in 2013. The Company expects the remaining restructuring charges will be paid throughout 2014.
Warrenville, Illinois Lease Vacancy
In the second quarter of 2012, the Company vacated the premises of its former world headquarters in Warrenville, Illinois. The cash payments associated with the lease vacancy obligation are expected to be completed by the end of 2016.
North American Manufacturing Restructuring Activities
The Company continues to evaluate opportunities to restructure and rationalize its Manufacturing operations in an effort to optimize our cost structure.
Chatham restructuring activities
In the third quarter of 2011, the Company committed to close its Chatham, Ontario heavy truck plant, which had been idled since June 2009. Potential additional charges in future periods could range from $20 million to $70 million, primarily related to pension and postretirement costs and termination benefits, which are subject to employee negotiation and acceptance rates.
Garland Facility closure
In the fourth quarter of 2012, the Company committed to plans for the closure of its Garland, Texas truck manufacturing operations (the "Garland Facility"). Beginning in early 2013, the Company began transitioning production from the Garland Facility to other North America operations that produce similar models. In the second quarter of 2013, production at the Garland Facility ceased. In the first and second quarters of 2013, we recognized charges of $12 million and $8 million, respectively, for the acceleration of depreciation of certain assets related to the facility that impacted Cost of products sold in the Company's Consolidated Statements of Operations.
Huntsville Facility
In February 2014, the Company announced plans to consolidate its mid-range engine manufacturing footprint and relocate mid-range engine production from its Huntsville, Alabama, facility ("Huntsville Facility") to its Melrose Park, Illinois facility ("Melrose Park Facility"). As a result, in the first quarter of 2014, the North America Truck segment recognized restructuring charges of $1 million for personnel costs related to employee terminations and $2 million for inventory reserves related to the idled production equipment at the Huntsville Facility that impacted Cost of products sold in the Company's Consolidated Statements of Operations.

14
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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Restructuring Liability
The following tables summarize the activity in the restructuring liability, which includes amounts related to discontinued operations and excludes pension and other postretirement contractual termination benefits:
(in millions)
Balance at October 31, 2013
 
Additions
 
Payments
 
Adjustments
 
Balance at January 31, 2014
Employee termination charges
$
15

 
$
2

 
$
(5
)
 
$
(1
)
 
$
11

Employee relocation costs
—

 
1

 
(1
)
 
—

 
—

Lease vacancy
18

 
—

 
(2
)
 
—

 
16

Other
1

 
—

 
(1
)
 
1

 
1

Restructuring liability
$
34

 
$
3

 
$
(9
)
 
$
—

 
$
28

(in millions)
Balance at
October 31, 2012
 
Additions
 
Payments
 
Adjustments
 
Balance at January 31, 2013
Employee termination charges
$
72

 
$
—

 
$
(27
)
 
$
(2
)
 
$
43

Employee relocation costs
—

 
1

 
(1
)
 
—

 
—

Lease vacancy
17

 
1

 
(2
)
 
1

 
17

Other
—

 
1

 
—

 
—

 
1

Restructuring liability
$
89

 
$
3

 
$
(30
)
 
$
(1
)
 
$
61

4. Finance Receivables
Finance receivables are receivables of our Financial Services operations. Finance receivables generally consist of wholesale notes and accounts, as well as retail notes, finance leases and accounts. Total finance receivables reported on the Consolidated Balance Sheets are net of an allowance for doubtful accounts. Total assets of our Financial Services operations net of intercompany balances are $2.2 billion and $2.4 billion as of January 31, 2014 and October 31, 2013, respectively. Included in total assets are finance receivables of $1.8 billion and $1.9 billion as of January 31, 2014 and October 31, 2013, respectively. We have two portfolio segments of finance receivables based on the type of financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.
Our Finance receivables, net, consist of the following:
(in millions)
January 31, 2014
 
October 31, 2013
Retail portfolio
$
739

 
$
751

Wholesale portfolio
1,049

 
1,207

Total finance receivables
1,788

 
1,958

Less: Allowance for doubtful accounts
24

 
23

Total finance receivables, net
1,764

 
1,935

Less: Current portion, net(A)
1,461

 
1,597

Noncurrent portion, net
$
303

 
$
338

_________________________
(A)
The current portion of finance receivables is computed based on contractual maturities. Actual cash collections typically vary from the contractual cash flows because of prepayments, extensions, delinquencies, credit losses, and renewals.
Securitizations
Our Financial Services operations transfers wholesale notes, retail accounts receivable, retail notes, finance leases, and operating leases through special purpose entities ("SPEs"), which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities. In addition to servicing receivables, our continued involvement in the SPEs may include an economic interest in the transferred receivables and, in some cases, managing exposure to interest rates using interest rate swaps and interest rate caps. There were no transfers of finance receivables that qualified for sale accounting treatment as of January 31, 2014 and October 31, 2013, and as a result, the transferred finance receivables are included in our Consolidated Balance Sheets and the related interest earned is included in Finance revenues.

15
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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

We transfer eligible finance receivables into retail note owner trusts or wholesale note owner trusts in order to issue asset-backed securities. These trusts are VIEs of which we are determined to be the primary beneficiary and, therefore, the assets and liabilities of the trusts are included in our Consolidated Balance Sheets. The outstanding balance of finance receivables transferred into these VIEs was $871 million and $948 million as of January 31, 2014 and October 31, 2013, respectively. Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $4 million as of both January 31, 2014 and October 31, 2013. For more information on assets and liabilities of consolidated VIEs and other securitizations accounted for as secured borrowings by our Financial Services segment, see Note 1, Summary of Significant Accounting Policies.
Finance Revenues
The following table presents the components of our Finance revenues:
 
Three Months Ended January 31,
(in millions)
2014
 
2013
Retail notes and finance leases revenue
$
17

 
$
21

Wholesale notes interest
18

 
20

Operating lease revenue
14

 
12

Retail and wholesale accounts interest
6

 
6

Gross finance revenues
55

 
59

Less: Intercompany revenues
(16
)
 
(20
)
Finance revenues
$
39

 
$
39

5. Allowance for Doubtful Accounts
Our two portfolio segments, retail and wholesale, each consist of one class of receivable based on: (i) initial measurement attributes of the receivables, and (ii) the assessment and monitoring of risk and performance of the receivables. For more information, see Note 4, Finance Receivables.
The following tables present the activity related to our allowance for doubtful accounts for our retail portfolio segment, wholesale portfolio segment, and trade and other receivables:
 
Three Months Ended January 31, 2014
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
21

 
$
2

 
$
37

 
$
60

Provision for doubtful accounts, net of recoveries
4

 
—

 
2

 
6

Charge-off of accounts(A)
(2
)
 
—

 
—

 
(2
)
Other(B)
(1
)
 
—

 
(3
)
 
(4
)
Allowance for doubtful accounts, at end of period
$
22

 
$
2

 
$
36

 
$
60

 
Three Months Ended January 31, 2013
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
27

 
$
—

 
$
24

 
$
51

Provision for doubtful accounts, net of recoveries
(1
)
 
2

 
—

 
1

Charge-off of accounts(A)
(3
)
 
—

 
—

 
(3
)
Allowance for doubtful accounts, at end of period
$
23

 
$
2

 
$
24

 
$
49

_________________________
(A)
We repossess sold and leased vehicles on defaulted finance receivables and leases, and place them into Inventories. Losses recognized at the time of repossession and charged against the allowance for doubtful accounts were less than $1 million for both the three months ended January 31, 2014 and 2013.
(B)
Amounts include currency translation.
The accrual of interest income is discontinued on certain impaired finance receivables. Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on non-accrual status. In certain cases, we continue to collect payments on our impaired finance receivables.

16
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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

The following table presents information regarding impaired finance receivables:
 
January 31, 2014
 
October 31, 2013
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Impaired finance receivables with specific loss reserves
$
14

 
$
—

 
$
14

 
$
15

 
$
—

 
$
15

Impaired finance receivables without specific loss reserves
1

 
—

 
1

 
1

 
—

 
1

Specific loss reserves on impaired finance receivables
5

 
—

 
5

 
6

 
—

 
6

Finance receivables on non-accrual status
13

 
—

 
13

 
10

 
—

 
10

For the impaired finance receivables in the retail portfolio as of January 31, 2014 and 2013, the average balances of those receivables were $14 million during both the three months ended January 31, 2014 and 2013.
The Company uses the aging of its receivables as well as other inputs when assessing credit quality. The following table presents the aging analysis for finance receivables:
 
January 31, 2014
 
October 31, 2013
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Current, and up to 30 days past due
$
686

 
$
1,044

 
$
1,730

 
$
699

 
$
1,204

 
$
1,903

30-90 days past due
40

 
4

 
44

 
44

 
2

 
46

Over 90 days past due
13

 
1

 
14

 
8

 
1

 
9

Total finance receivables
$
739

 
$
1,049

 
$
1,788

 
$
751

 
$
1,207

 
$
1,958

6. Inventories
The following table presents the components of Inventories:
(in millions)
January 31,
2014
 
October 31,
2013
Finished products
$
775

 
$
692

Work in process
101

 
58

Raw materials
506

 
460

Total inventories
$
1,382

 
$
1,210

7. Debt
(in millions)
January 31, 2014
 
October 31, 2013
Manufacturing operations
 
 
 
Senior Secured Term Loan Credit Facility, as Amended, due 2017, net of unamortized discount of $4 for both periods
$
693

 
$
693

8.25% Senior Notes, due 2021, net of unamortized discount of $22 for both periods
1,178

 
1,178

3.00% Senior Subordinated Convertible Notes, due 2014, net of unamortized discount of $19 and $26, respectively
551

 
544

4.50% Senior Subordinated Convertible Notes, due 2018, net of unamortized discount of $22 and $23, respectively
178

 
177

Debt of majority-owned dealerships
46

 
48

Financing arrangements and capital lease obligations
70

 
77

Loan Agreement related to 6.5% Tax Exempt Bonds, due 2040
225

 
225

Promissory Note
18

 
20

Financed lease obligations
219

 
218

Other
34

 
39

Total Manufacturing operations debt
3,212

 
3,219

Less: Current portion
662

 
658

Net long-term Manufacturing operations debt
$
2,550

 
$
2,561


17
Table of Contents
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

(in millions)
January 31, 2014
 
October 31, 2013
Financial Services operations
 
 
 
Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2019
$
752

 
$
778

Bank revolvers, at fixed and variable rates, due dates from 2014 through 2019
820

 
1,018

Commercial paper, at variable rates, program matures in 2015
22

 
21

Borrowings secured by operating and finance leases, at various rates, due serially through 2018
58

 
49

Total Financial Services operations debt
1,652

 
1,866

Less: Current portion
597

 
505

Net long-term Financial Services operations debt
$
1,055

 
$
1,361

Financial Services Operations
In November 2013, Navistar Financial, S.A. de C.V., SOFOM, E.N.R, our Mexican financial services affiliate ("NFM")expanded its facility of five-year notes secured by retail finance receivables by selling an additional P$800 million (the equivalent of US $60 million at January 31, 2014).
In December 2013, International Truck Leasing Corporation, a special purpose, wholly-owned subsidiary of NFC, issued borrowings secured by operating and finance leases of $21 million.
8. Postretirement Benefits
Defined Benefit Plans
We provide postretirement benefits to a substantial portion of our employees and retirees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, and surviving spouses and dependents. Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. For the three months ended January 31, 2014 and 2013, we contributed $29 million and $27 million, respectively, to our pension plans to meet regulatory funding requirements. We currently anticipate additional contributions of $169 million to our pension plans during the remainder of 2014.
We primarily fund other post-employment benefit ("OPEB") obligations, such as retiree medical, in accordance with a 1993 Settlement Agreement (the "1993 Settlement Agreement"), which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base Trust"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of the Company's then applicable retiree health care and life insurance benefits. Contributions for the three months ended January 31, 2014 and 2013, as well as anticipated contributions for the remainder of 2014, are not material.
Components of Net Periodic Benefit Expense (Income)
Net postretirement benefits expense included in our Consolidated Statements of Operations is comprised of the following:
 
Three Months Ended January 31,
 
Pension Benefits
 
Health and Life
Insurance Benefits
(in millions)
2014
 
2013
 
2014
 
2013
Service cost for benefits earned during the period
$
4

 
$
5

 
$
1

 
$
2

Interest on obligation
39

 
36

 
17

 
15

Amortization of cumulative loss
24

 
32

 
4

 
7

Amortization of prior service benefit
—

 
—

 
(1
)
 
(1
)
Expected return on assets
(48
)
 
(47
)
 
(8
)
 
(8
)
Net postretirement benefits expense
$
19

 
$
26

 
$
13

 
$
15

Defined Contribution Plans and Other Contractual Arrangements
Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the Company. Effective February 1, 2013, the Company changed the timing for depositing the matching contributions to

18
Table of Contents
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

the end of the calendar year. Many participants covered by the plans receive annual Company contributions to their retirement accounts based on an age-weighted percentage of the participant's eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $8 million and $7 million in the three months ended January 31, 2014 and 2013, respectively.
In accordance with the 1993 Settlement Agreement, an independent Retiree Supplemental Benefit Trust (the "Supplemental Trust") was established. The Supplemental Trust, and the benefits it provides to certain retirees pursuant to a certain Retiree Supplemental Benefit Program under the 1993 Settlement Agreement ("Supplemental Benefit Program"), is not part of the Company's consolidated financial statements. The assets of the Supplemental Trust arise from three sources: (i) the Company's 1993 contribution to the Supplemental Trust of 25.5 million shares of our Class B common stock, which were subsequently sold by the Supplemental Trust prior to 2000, (ii) contingent profit-sharing contributions made by the Company pursuant to a certain Supplemental Benefit Trust Profit Sharing Plan ("Supplemental Benefit Profit Sharing Plan"), and (iii) net investment gains on the Supplemental Trust's assets, if any.
The Company's contingent profit sharing obligations under the Supplemental Benefits Profit Sharing Plan will continue until certain funding targets defined by the 1993 Settlement Agreement are met ("Profit Sharing Cessation"). Upon Profit Sharing Cessation, the Company would assume responsibility for (i) establishing the investment policy for the Supplemental Trust, (ii) approving or disapproving of certain additional supplemental benefits to the extent such benefits would result in higher expenditures than those contemplated upon the Profit Sharing Cessation, and (iii) making additional contributions to the Supplemental Trust as necessary to make up for investment and/or actuarial losses. We have recorded no profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits. For more information, see Note 12, Commitments and Contingencies, for a discussion of pending litigation regarding the Supplemental Benefit Profit Sharing Plan.
9. Income Taxes
We compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense. For all periods presented, U.S. and certain foreign results are excluded from ordinary income due to ordinary losses for which no benefit can be recognized. Ordinary income refers to income (loss) before income tax expense excluding significant unusual or infrequently occurring items. The tax effect of a significant unusual or infrequently occurring item is recorded in the interim period in which it occurs. Items included in income tax expense in the periods in which they occur include the tax effects of material restructurings and impairments, cumulative effect of changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment regarding the ability to realize deferred tax assets in future years.
We have evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. We continue to maintain a valuation allowance on our U.S. deferred tax assets, as well as certain foreign deferred tax assets, that we believe, on a more-likely-than-not basis, will not be realized. For all remaining deferred tax assets, while we believe that it is more likely than not that they will be realized, we believe that it is reasonably possible that additional deferred tax asset valuation allowances could be required in the next twelve months.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of January 31, 2014, the amount of liability for uncertain tax positions was $64 million. If the unrecognized tax benefits are recognized, all but $6 million would impact our effective tax rate. However, to the extent we continue to maintain a full valuation allowance against certain deferred tax assets, the effect may be in the form of an increase in the deferred tax asset related to our net operating loss carry forward, which would be offset by a full valuation allowance.
We recognize interest and penalties related to uncertain tax positions as part of Income tax benefit (expense). For the three months ended January 31, 2014 and 2013, total interest and penalties related to our uncertain tax positions resulted in an income tax benefit of $3 million and expense of $4 million, respectively.
We have open tax years back to 2001 with various significant taxing jurisdictions including the U.S., Canada, Mexico, and Brazil. In connection with the examination of tax returns, contingencies may arise that generally result from differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenues or expenses in taxable income, or the sustainability of tax credits to reduce income taxes payable. We believe we have sufficient accruals for

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

our contingent tax liabilities. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns, although actual results may differ. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next 12 months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash flows.
In the three months ended January 31, 2014, we reached a tax settlement with the State of Alabama, which resulted in the recording of a decrease to our uncertain tax positions of $8 million. In the first quarter of 2013, we accrued $12 million related to this matter, but later reduced our accrual by $4 million in the fourth quarter of 2013 in anticipation of the settlement.
10. Fair Value Measurements
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, we classify each fair value measurement as follows:
•
Level 1—based upon quoted prices for identical instruments in active markets,
•
Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
•
Level 3—based upon one or more significant unobservable inputs.
The following section describes key inputs and assumptions in our valuation methodologies:
Cash Equivalents and Restricted Cash Equivalents—We classify highly liquid investments, with an original maturity of 90 days or less, including U.S. Treasury bills, federal agency securities, and commercial paper, as cash equivalents. The carrying amounts of cash and cash equivalents and restricted cash approximate fair value because of the short-term maturity and highly liquid nature of these instruments.
Marketable Securities—Our marketable securities portfolios are classified as available-for-sale and primarily include investments in U.S. government securities and commercial paper with a maturity of greater than 90 days from the date of purchase. We use quoted prices from active markets to determine fair value.
Derivative Assets and Liabilities—We measure the fair value of derivatives assuming that the unit of account is an individual derivative transaction and that each derivative could be sold or transferred on a stand-alone basis. We classify within Level 2 our derivatives that are traded over-the-counter and valued using internal models based on observable market inputs. In certain cases, market data is not available and we estimate inputs such as in situations where trading in a particular commodity is not active. Measurements based upon these unobservable inputs are classified within Level 3. For more information regarding derivatives, see Note 11, Financial Instruments and Commodity Contracts.
Guarantees—We provide certain guarantees of payments and residual values to specific counterparties. Fair value of these guarantees is based upon internally developed models that utilize current market-based assumptions and historical data. We classify these liabilities within Level 3. For more information regarding guarantees, see Note 12, Commitments and Contingencies.

20
Table of Contents
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

The following table presents the financial instruments measured at fair value on a recurring basis:
 
January 31, 2014
 
October 31, 2013
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury bills
$
281

 
$
—

 
$
—

 
$
281

 
$
396

 
$
—

 
$
—

 
$
396

Other
349

 
—

 
—

 
349

 
434

 
—

 
—

 
434

Derivative financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
—

 
—

 
—

 
—

 
—

 
4

 
—

 
4

Interest rate caps
—

 
3

 
—

 
3

 
—

 
1

 
—

 
1

Total assets
$
630

 
$
3

 
$
—

 
$
633

 
$
830

 
$
5

 
$
—

 
$
835

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
—

 
$
1

 
$
—

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

Guarantees
—

 
—

 
6

 
6

 
—

 
—

 
6

 
6

Total liabilities
$
—

 
$
1

 
$
6

 
$
7

 
$
—

 
$
—

 
$
6

 
$
6

The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy:
 
Three Months Ended January 31,
 
2014
 
2013
(in millions)
Guarantees
 
Commodity contracts
 
Guarantees
 
Commodity contracts
Balance at November 1
$
(6
)
 
$
—

 
$
(7
)
 
$
—

Transfers out of Level 3
—

 
—

 
—

 
—

Issuances
—

 
—

 
—

 
—

Settlements
—

 
—

 
—

 
—

Balance at January 31
$
(6
)
 
$
—

 
$
(7
)
 
$
—

Change in unrealized gains on assets and liabilities still held
$
—

 
$
—

 
$
—

 
$
—

The following table presents the financial instruments measured at fair value on a nonrecurring basis:
(in millions)
January 31, 2014
 
October 31, 2013
Level 2 financial instruments
 
 
 
Carrying value of impaired finance receivables (A)
$
14

 
$
15

Specific loss reserve
(5
)
 
(6
)
Fair value
$
9

 
$
9

_________________________
(A)
Certain impaired finance receivables are measured at fair value on a nonrecurring basis. An impairment charge is recorded for the amount by which the carrying value of the receivables exceeds the fair value of the underlying collateral, net of remarketing costs. Fair values of the underlying collateral are determined by reference to dealer vehicle value publications adjusted for certain market factors.

In the first quarter of 2014, the Company concluded it had a triggering event related to potential sales of assets requiring assessment of impairment for certain intangible and long-lived assets in the North America Truck segment. As a result, certain amortizing intangible assets and long-lived assets with a carrying value of $18 million were determined to be fully impaired, resulting in an impairment charge of $18 million, which was included in Asset impairment charges in the Company's Consolidated Statements of Operations. We utilized the market approach to determine the fair values of these Level 2 assets.
In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to market on a recurring basis. The carrying amounts of Cash and cash equivalents, Restricted cash, and Accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables generally consist of retail and wholesale accounts and retail and wholesale notes. The carrying amounts of Trade and other receivables and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their

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

variable interest rate terms. The fair values of these financial instruments are classified as Level 1. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below.
The fair values of our retail notes are estimated by discounting expected cash flows at estimated current market rates. The fair values of our retail notes are classified as Level 3 financial instruments.
The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. Our Loan Agreement underlying the Tax Exempt Bonds is traded, but is illiquid, and as a result, is classified as Level 2. The fair values of our Level 3 debt instruments are generally determined using internally developed valuation techniques such as discounted cash flow modeling. Inputs such as discount rates and credit spreads reflect our estimates of assumptions that market participants would use in pricing the instrument and may be unobservable.
The following tables present the carrying values and estimated fair values of financial instruments:
 
As of January 31, 2014
 
Estimated Fair Value
 
Carrying Value
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets
 
 
 
 
 
 
 
 
 
Retail notes
$
—

 
$
—

 
$
339

 
$
339

 
$
335

Notes receivable
—

 
—

 
12

 
12

 
70

Liabilities
 
 
 
 
 
 
 
 
 
Debt:
 
 
 
 
 
 
 
 
 
Manufacturing operations
 
 
 
 
 
 
 
 
 
Senior Secured Term Loan Credit Facility, as Amended due 2017
—

 
—

 
723

 
723

 
693

8.25% Senior Notes, due 2021
1,264

 
—

 
—

 
1,264

 
1,178

3.0% Senior Subordinated Convertible Notes, due 2014(A)
577

 
—

 
—

 
577

 
551

4.50% Senior Subordinated Convertible Notes, due 2018
—

 
—

 
199

 
199

 
178

Debt of majority-owned dealerships
—

 
—

 
46

 
46

 
46

Financing arrangements
—

 
—

 
39

 
39

 
67

Loan Agreement related to 6.5% Tax Exempt Bonds, due 2040
—

 
224

 
—

 
224

 
225

Promissory Note
—

 
—

 
18

 
18

 
18

Financed lease obligations
—

 
—

 
219

 
219

 
219

Other
—

 
—

 
31

 
31

 
34

Financial Services operations
 
 
 
 
 
 
 
 
 
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2019
—

 
—

 
746

 
746

 
752

Bank revolvers, at fixed and variable rates, due dates from 2014 through 2019
—

 
—

 
798

 
798

 
820

Commercial paper, at variable rates, program matures in 2015
22

 
—

 
—

 
22

 
22

Borrowings secured by operating and finance leases, at various rates, due serially through 2018
—

 
—

 
58

 
58

 
58



22
Table of Contents
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

 
As of October 31, 2013
 
Estimated Fair Value
 
Carrying Value
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets
 
 
 
 
 
 
 
 
 
Retail notes
$
—

 
$
—

 
$
390

 
$
390

 
$
390

Notes receivable
—

 
—

 
13

 
13

 
14

Liabilities
 
 
 
 
 
 
 
 
 
Debt:
 
 
 
 
 
 
 
 
 
Manufacturing operations
 
 
 
 
 
 
 
 
 
Senior Secured Term Loan Credit Facility, as Amended due 2017
—

 
—

 
720

 
720

 
693

8.25% Senior Notes, due 2021
1,274

 
—

 
—

 
1,274

 
1,178

3.0% Senior Subordinated Convertible Notes, due 2014(A)
586

 
—

 
—

 
586

 
544

4.50% Senior Subordinated Convertible Notes, due 2018
—

 
—

 
203

 
203

 
177

Debt of majority-owned dealerships
—

 
—

 
48

 
48

 
48

Financing arrangements
—

 
—

 
44

 
44

 
73

Loan Agreement related to 6.5% Tax Exempt Bonds, due 2040
—

 
229

 
—

 
229

 
225

Promissory Note
—

 
—

 
20

 
20

 
20

Financed Lease Obligations
—

 
—

 
218

 
218

 
218

Other
—

 
—

 
36

 
36

 
39

Financial Services operations
 
 
 
 
 
 
 
 
 
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2019
—

 
—

 
775

 
775

 
778

Bank revolvers, at fixed and variable rates, due dates from 2014 through 2019
—

 
—

 
990

 
990

 
1,018

Commercial paper, at variable rates, program matures in 2015
21

 
—

 
—

 
21

 
21

Borrowings secured by operating and finance leases, at various rates, due serially through 2017
—

 
—

 
49

 
49

 
49

_________________________
(A)
The carrying value represents the consolidated financial statement amount of the debt which excludes the allocation of the conversion feature to equity, while the fair value is based on quoted market prices for the convertible note which includes the equity feature.
11. Financial Instruments and Commodity Contracts
Derivative Financial Instruments
We use derivative financial instruments as part of our overall interest rate, foreign currency, and commodity risk management strategies to reduce our interest rate exposure, reduce exchange rate risk for transactional exposures denominated in currencies other than the functional currency, and minimize the effect of commodity price volatility. From time to time, we use foreign currency forward and option contracts to manage the risk of exchange rate movements that would affect the value of our foreign currency cash flows. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the functional currency. From time to time, we also use commodity forward contracts to manage our exposure to variability in certain commodity prices. In 2009, in connection with the sale of our 3.00% Senior Subordinated Convertible Notes, due 2014 (the "2014 Convertible Notes"), we purchased call options for $125 million. The call options are intended to minimize share dilution associated with the 2014 Convertible Notes. As the call options and warrants are indexed to our common stock, we recognized them in permanent equity in Additional paid in capital in the Company's Consolidated Balance Sheets, and will not recognize subsequent changes in fair value as long as the instruments remain classified as equity.
We generally do not enter into derivative financial instruments for speculative or trading purposes and did not during the three months ended January 31, 2014 and 2013. None of our derivatives qualified for hedge accounting treatment during the three months ended January 31, 2014 and 2013.
The majority of our derivative contracts are transacted under International Swaps and Derivatives Association ("ISDA") master agreements. Each agreement permits the net settlement of amounts owed in the event of default or certain other termination events. For derivative financial instruments, we have elected not to offset derivative positions in the balance sheet with the same counterparty under the same agreement. Certain of our derivative contracts contain provisions that require us to provide collateral if certain thresholds are exceeded. No collateral was provided at January 31, 2014 and at October 31, 2013. Collateral

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Table of Contents
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

is generally not required to be provided by our counter-parties for derivative contracts. We manage exposure to counter-party credit risk by entering into derivative financial instruments with various major financial institutions that can be expected to fully perform under the terms of such instruments. We do not anticipate nonperformance by any of the counter-parties. Our exposure to credit risk in the event of nonperformance by the counter-parties is limited to those assets that have been recorded, but have not yet been received in cash. At January 31, 2014 and October 31, 2013, our exposure to the credit risk of others was $3 million and $5 million, respectively.
Our Financial Services operations may use interest rate swaps or interest rate caps from time to time to manage exposure to fluctuations in interest rates by limiting the amount of fixed rate finance receivables that are funded with variable rate debt. The Mexican Financial Services operation uses cross currency swaps to limit exposure to fluctuations in the value of the peso, as required under Mexican bank credit facilities.
The fair values of all derivatives are recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. The following table presents the fair values of our derivatives and their respective balance sheet locations:
 
January 31, 2014
 
Asset Derivatives
 
Liability Derivatives
(in millions)
Location in
Consolidated Balance Sheets
 
Fair Value
 
Location in
Consolidated Balance Sheets
 
Fair Value
Foreign currency contracts
Other current assets
 
$
—

 
Other current liabilities
 
$
1

Interest rate caps
Other current assets
 
3

 
Other noncurrent liabilities
 
—

Total fair value
 
$
3

 
 
 
$
1

 
October 31, 2013
 
Asset Derivatives
 
Liability Derivatives
(in millions)
Location in
Consolidated Balance Sheets
 
Fair Value
 
Location in
Consolidated Balance Sheets
 
Fair Value
Foreign currency contracts
Other current assets
 
$
4

 
Other current liabilities
 
$
—

Interest rate caps
Other noncurrent assets
 
1

 
Other current liabilities
 
—

Total fair value
 
$
5

 
 
 
$
—

The following table presents the location and amount of loss (gain) recognized in our Consolidated Statements of Operations related to derivatives:
 
Location in Consolidated Statements of Operations
 
Three Months Ended January 31,
(in millions)
 
2014
 
2013
Cross currency swaps
Other expense (income), net
 
$
1

 
$
—

Interest rate caps
Interest expense
 
(1
)
 
—

Foreign currency contracts
Other expense (income), net
 
—

 
1

Total loss
 
$
—

 
$
1

Foreign Currency Contracts
During 2014 and 2013, we entered into foreign exchange forward and option contracts as economic hedges of anticipated cash flows denominated in Canadian Dollars, Brazilian Reais and Euros. All contracts were entered into to protect against the risk that the eventual cash flows resulting from certain transactions would be affected by changes in exchange rates between the U.S. dollar and the respective foreign currency.

24
Table of Contents
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

The following table presents the outstanding foreign currency contracts as of January 31, 2014 and October 31, 2013:
(in millions)
Currency
 
Notional Amount
 
Maturity
As of January 31, 2014
 
 
 
 
 
Forward exchange contract
EUR
 
€
20

 
April 2014
As of October 31, 2013
 
 
 
 
 
Option collar contracts
EUR
 
€
2

 
October 2013
Forward exchange contract
CAD
 
C$
90

 
October 2013
Option collar contract
CAD
 
C$
50

 
October 2013
Option collar contract
BRL
 
US$
25

 
October 2013
Commodity Forward Contracts
During 2014 and 2013, we entered into commodity forward contracts as economic hedges of our exposure to variability in commodity prices for diesel fuel and steel. As of January 31, 2014, we had outstanding diesel fuel contracts with aggregate notional values of $6 million and outstanding steel contracts with aggregate notional values of $11 million. The commodity forward contracts have maturity dates ranging from May 31, 2014 to July 31, 2014. As of October 31, 2013, we had outstanding diesel fuel contracts with aggregate notional values of $2 million and outstanding steel contracts with aggregate notional values of $11 million. All of these contracts were entered into to protect against the risk that the eventual cash flows related to purchases of the commodities will be affected by changes in prices.
Interest-Rate Contracts
From time to time, we enter into various interest-rate contracts, interest rate caps, and cross currency swaps. As of January 31, 2014 and October 31, 2013, the notional amount of our outstanding cross currency swaps was $30 million and $45 million, respectively. We are exposed to interest rate and exchange rate risk as a result of our borrowing activities. The objective of these contracts is to mitigate fluctuations in earnings, cash flows, and fair value of borrowings. Our Mexican financial services operation uses interest rate caps to protect against the potential of rising interest rates as required by the terms of its variable-rate asset-backed securities. As of January 31, 2014 and October 31, 2013, the notional amount of our outstanding interest rate caps was $135 million and $78 million, respectively.
12. Commitments and Contingencies
Guarantees
We occasionally provide guarantees that could obligate us to make future payments if the primary entity fails to perform under its contractual obligations. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet the recognition and measurement provisions of U.S. GAAP. In addition to the liabilities that have been recognized, we are contingently liable for other potential losses under various guarantees. We do not believe that claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or cash flows.
In March 2010, we entered into an operating agreement, as amended, which contains automatic extensions and is subject to early termination provisions, with GE (the "GE Operating Agreement"). Under the terms of the GE Operating Agreement, as amended, GE is our preferred source of retail customer financing for equipment offered by us and our dealers in the U.S. We provide GE with a loss sharing arrangement for certain credit losses. Under the loss sharing arrangement we generally reimburse GE for credit losses in excess of the first 10% of the original value of a financed contract. The Company’s exposure to loss is mitigated because receivables financed under the GE Operating Agreement are secured by the financed equipment. We do not carry the receivables financed under the GE Operating Agreement on our Consolidated Balance Sheets. There were $1.4 billion of outstanding finance receivables at both January 31, 2014 and October 31, 2013 financed through the GE Operating Agreement and subject to the loss sharing arrangement. The related originations of these outstanding finance receivables were $2.0 billion at both January 31, 2014 and October 31, 2013. Related to certain third-party equipment financings by GE and for which we have accounted for as borrowings, we have recognized equipment leased to others of $190 million and financed lease obligations of $219 million included in our Consolidated Balance Sheets for the period ended January 31, 2014.
Historically, our losses, representing the entire loss amount, on similar finance receivables, measured as a percentage of the average balance of the related finance receivable, ranged from 0.3% to 2.1%. While under limited circumstances NFC retains the right to originate retail customer financing, we expect retail finance receivables and retail finance revenues will continue to

25
Table of Contents
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

decline as our retail portfolio pays down. Based on our historic experience of losses on similar finance receivables and the nature of the loss sharing arrangement, we do not believe our share of losses related to balances currently outstanding will be material.
For certain independent dealers’ wholesale inventory financed by third-party banks or finance companies, we provide limited repurchase agreements to the respective financing institution. The amount of losses related to these arrangements has not been material to our Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows and the value of the guarantees and accruals recorded are not material to our Consolidated Balance Sheets.
We also have issued limited residual value guarantees in connection with various leases. The amounts of the guarantees are estimated and recorded. Our guarantees are contingent upon the fair value of the leased assets at the end of the lease term. The amount of losses related to these arrangements has not been material to our Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows and the value of the guarantees and accruals recorded are not material to our Consolidated Balance Sheets.
We obtain certain stand-by letters of credit and surety bonds from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance-related requirements. As of January 31, 2014, the amount of stand-by letters of credit and surety bonds was $203 million.
We extend credit commitments to certain truck fleet customers, which allow them to purchase parts and services from participating dealers. The participating dealers receive accelerated payments from us with the result that we carry the receivables and absorb the credit risk related to these customers. As of January 31, 2014, we have $7 million of unused credit commitments outstanding under this program.
In addition, as of January 31, 2014, we have entered into various purchase commitments of $187 million and contracts that have cancellation fees of $49 million with various expiration dates through 2019.
In the ordinary course of business, we also provide routine indemnifications and other guarantees, the terms of which range in duration and often are not explicitly defined. We do not believe these will result in claims that would have a material impact on our financial condition, results of operations, or cash flows.
Environmental Liabilities
We have 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. Based on information available to us which, in most cases, consists of data related to quantities and characteristics of material generated at current or former Company locations, material allegedly shipped by us to these disposal sites, as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of our share of the probable costs, if any, and accruals are recorded in our consolidated financial statements. These accruals are generally recognized no later than upon completion of the remedial feasibility study and are not discounted to their present value. We review all accruals on a regular basis and believe that, based on these calculations, our share of the potential additional costs for the cleanup of each site will not have a material effect on our financial condition, results of operations, or cash flows.
Two sites formerly owned by us: (i) Solar Turbines in San Diego, California, and (ii) the Canton Plant in Canton, Illinois; were identified as having soil and groundwater contamination. Two sites in Sao Paulo, Brazil, where we are currently operating, were identified as having soil and groundwater contamination. While investigations and cleanup activities continue at these and other sites, we believe that we have adequate accruals to cover costs to complete the cleanup of all sites.
We have accrued $22 million for these and other environmental matters, which are included within Other current liabilities and Other noncurrent liabilities, as of January 31, 2014. The majority of these accrued liabilities are expected to be paid subsequent to 2014.
Along with other vehicle manufacturers, we have been subject to an increased 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 generally 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. Historically, the actual damages paid out to claimants have not been material in any year to our financial condition,

26
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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

results of operations, or cash flows. It is possible that the number of these claims will continue to grow, and that the costs for resolving asbestos related claims could become significant in the future.
Legal Proceedings
Overview
We are subject to various claims arising in the ordinary course of business, and are party 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 addition, from time to time we are subject to various claims and legal proceedings related to employee compensation, benefits, and benefits administration including, but not limited to, compliance with the Employee Retirement Income Security Act of 1974, as amended, and Department of Labor requirements. 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, or cash flows.
Profit Sharing Disputes
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 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 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. The Company’s motion is currently pending before the Court.  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
International Indústria de Motores da América do Sul Ltda. ("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 January 31, 2014), 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.
Lis Franco de Toledo, et. al. vs. Syntex do Brasil and IIAA
In 1973, Syntex do Brasil Industria e Comercio Ltda. ("Syntex"), a predecessor of IIAA, our Brazilian engine manufacturing subsidiary, which was formerly known as MWM International Industria de Motores da America do Sul Ltda ("MWM"), filed a lawsuit in Brazilian court against Dr. Lis Franco de Toledo and others (collectively, "Lis Franco"). Syntex claimed Lis Franco had improperly terminated a contract which provided for the transfer from Lis Franco to Syntex of a patent for the production of a certain vaccine. Lis Franco filed a counterclaim alleging that he was entitled to royalties under the contract. In 1975, the Brazilian court ruled in favor of Lis Franco, a decision which was affirmed on appeal in 1976. In 1984, while the case was still pending, Syntex’ owner, Syntex Comercio e Participacoes Ltds ("Syntex Parent") sold the stock of Syntex to MWM, and in connection with that sale Syntex Parent agreed to indemnify and hold harmless MWM for any and all liabilities of Syntex, including its prior pharmaceutical operations (which had been previously spun-off to another subsidiary wholly-owned by the Syntex Parent) and any payments that might be payable under the Lis Franco lawsuit. In the mid to late 1990s, Syntex Parent was merged with an entity known as Wyeth Industria Farmaceutica LTDA ("Wyeth").

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Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

In 1999, Lis Franco amended its pleadings to add MWM to the lawsuit as a defendant. In 2000, Wyeth acknowledged to the Brazilian court its sole responsibility for amounts due in the Lis Franco lawsuit and MWM asked the court to be dismissed from that action. The judge denied that request. MWM appealed and lost.
In his pleadings, Lis Franco alleged that the royalties payable to him were approximately R$42 million. MWM believed the appropriate amount payable was approximately R$16 million. In December 2009, the court appointed expert responsible for the preparation of the royalty calculation filed a report with the court indicating royalty damages of approximately R$70 million. MWM challenged the expert’s calculation. In August 2010, the court asked the parties to consider the appointment of a new expert. MWM agreed with this request but Lis Franco objected and, in September 2010, the court accepted and ratified the expert’s calculation as of May 2010 in the amount of R$74 million and entered judgment against MWM.
In September 2010, MWM filed a motion for clarification of the decision which would suspend its enforcement. The Brazilian court denied this motion and MWM appealed the matter to the Rio de Janeiro State Court of Appeals (the "Court of Appeals"). In January 2011, the Court of Appeals granted the appeal and issued an injunction suspending the lower court’s decision and judgment in favor of Lis Franco. In January 2011, MWM merged into IIAA and is now known as IIAA. An expert appointed by the Court of Appeals submitted his calculation report on October 24, 2011, and determined the amount to be R$10.85 million. The parties submitted comments to such report in December 2011, the expert replied to these comments and ratified his previous report in May 2012, and the parties again submitted comments to the expert's reply. The expert reviewed these comments and submitted a complementary report in December 2012 which determined the amount to be R$22 million. The parties submitted comments to the complementary report in January 2013. In May 2013, the Court of Appeals determined the damages amount to be R$25 million (the equivalent of approximately US$12 million at January 31, 2014). Wyeth, Lis Franco and MWM filed motions for clarification against such decision and in July 2013 the Court of Appeals denied all of these motions. MWM, Wyeth and Lis Franco filed a special appeal to the Brasilia Special Court of Appeals on August 20, 2013. The Brasilia Special Court of Appeals has not yet ruled on the special appeal.
In parallel, in May 2010, MWM filed a lawsuit in Sao Paulo, Brazil, against Wyeth seeking recognition that Wyeth is liable for any and all liabilities, costs, expenses, and payments related to the Lis Franco lawsuit. In September 2012, the Sao Paulo court ruled in favor of MWM and ordered Wyeth to pay, directly to the Estate of Lis Franco de Toledo and others and jointly with MWM, the amounts of the condemnation, to be determined at the end of the liquidation proceeding. The Sao Paulo court also ordered Wyeth to reimburse MWM for all expenses, including court costs and attorney fees associated with the case. The parties were notified of the decision in October 2012, to which MWM and Wyeth filed motions for clarification of certain issues, and in December 2012, the Sao Paulo court rejected both motions. In January 2013, Wyeth filed an appeal to the San Paulo court's December 2012 decision, and in April 2013, MWM filed an answer to the appeal. The appeal was rejected by the Court of Appeals on September 10, 2013. Wyeth filed a motion for clarification to the Court of Appeals. The motion was rejected by the Court of Appeals on November 5, 2013.
The parties are currently in settlement discussions with respect to these matters.
Westbrook vs. Navistar. et. al.
In April 2011, a False Claims Act qui tam complaint against Navistar, Inc., Navistar Defense, LLC, a wholly owned subsidiary of the Company ("Navistar Defense"), and unrelated third parties was unsealed by the United States District Court for the Northern District of Texas (the "Court"). The complaint was initially filed under seal in August 2010 by a qui tam relator ("Westbrook") on behalf of the federal government. The complaint alleged violations of the False Claims Act based on allegations that parts of vehicles delivered by Navistar Defense were not painted according to the contract specification, and improper activities in dealing with one of the vendors who painted certain of the vehicle parts. The complaint seeks monetary damages and civil penalties on behalf of the federal government, as well as costs and expenses. After the complaint was unsealed, the U.S. government notified the Court that it declined to intervene at that time. Navistar, Inc. was served with the complaint in July 2011, and a scheduling order and a revised scheduling order was entered by the Court. In December 2011, the Court granted a motion by Navistar, Inc. and Navistar Defense, along with the other named defendants to judicially estop Westbrook and his affiliated company from participating in any recovery from the action, and to substitute his bankruptcy trustee (the "Trustee") as the only person with standing to pursue Westbrook's claims. In March 2012, the Court granted motions by Navistar, Inc., Navistar Defense, and the other named defendants to dismiss the complaint. The dismissal was without prejudice and the Trustee filed an amended complaint in April 2012. In May 2012, Navistar, Inc., Navistar Defense, and the other named defendants filed motions to dismiss the amended complaint. In addition, the parties jointly filed a motion to stay discovery pending resolution of the motions to dismiss. In July 2012, the Court granted all of the defendants' motions to dismiss with prejudice, dismissing all of the claims except the claim against Navistar Defense for retaliation and the claim against Navistar, Inc. for retaliation, which was dismissed without prejudice. Plaintiff was granted leave to file an amended complaint including only the retaliation claims against Navistar Defense and Navistar, Inc. The Trustee did not file a retaliation

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Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

claim against Navistar, Inc. and voluntarily dismissed without prejudice the retaliation claim against Navistar Defense. The Trustee also filed a motion for reconsideration of the dismissal of the False Claims Act claims against Navistar Defense which the Court denied. The Court issued final judgment dismissing the matter in July 2012. Westbrook filed a notice of appeal to the Fifth Circuit Court of Appeals ("Fifth Circuit") in August 2012 as to the final judgment and the motion for reconsideration as to Navistar Defense only. The Trustee filed a separate notice of appeal to the Fifth Circuit in August 2012 as to several district court orders, including the December 2011 order holding the Trustee, not Westbrook, to be the proper party in the case. In December 2012, Navistar Defense's motion to dismiss Westbrook's appeal was denied "without prejudice to reconsideration by the oral argument panel" by the Fifth Circuit. The Fifth Circuit heard oral arguments on both appeals in November 2013 but has not yet issued a ruling on either appeal.
Based on our assessment of the facts underlying the claims in the above action, we are unable to provide meaningful quantification of how the final resolution of these claims may impact our future consolidated financial condition, results of operations, or cash flows.
EPA Notice of Violation
In February 2012, Navistar, Inc. received a Notice of Violation ("NOV") from the U.S. Environmental Protection Agency ("EPA"). The NOV pertains to approximately 7,600 diesel engines which, according to the EPA, were produced by Navistar, Inc. in 2010 and, therefore, should have met the EPA's 2010 emissions standards. Navistar, Inc. previously provided information to the EPA showing that the engines were in fact produced in 2009. The NOV contains the EPA's conclusion that Navistar, Inc.'s alleged production of the engines in 2010 violated the Federal Clean Air Act. The NOV states that the EPA reserves the right to file an administrative complaint or to refer this matter to the U.S. Department of Justice with a recommendation that a civil complaint be filed in federal district court. 
Based on our assessment of the facts underlying the NOV above, we are unable to provide meaningful quantification of how the final resolution of this matter may impact our future consolidated financial condition, results of operations or cash flows.
CARB Notice of Violation
In April 2013, Navistar, Inc. received a notice of violation and proposed settlement ("Notice") from the California Air Resources Board ("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. Beginning in June 2013, the Company has made settlement offers to CARB and remains in discussions regarding this matter.
Based on our assessment of the facts underlying the Notice from CARB, we are unable to provide meaningful quantification of how the final resolution of this matter may impact our future consolidated financial condition, results of operations or cash flows.
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 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 cases before one judge 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. The defendants filed Motions to Dismiss on December 17, 2013. The plaintiff filed an Omnibus Opposition to Defendants’ Motions to Dismiss, and a Motion to Strike on January 31, 2014. The defendants filed their opposition to the Motion to Strike on February 18, 2014 and filed a reply in support of their Motions to Dismiss on March 3, 2014.

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Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

In March 2013, James Gould filed a derivative complaint 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. Pursuant to a court order in May 2013, this matter has been stayed until the outcome of any motion to dismiss in the 10b-5 Cases.
Each of these matters is pending in the United States District Court, Northern District of Illinois.
In August 2013, Abbie Griffin, filed a derivative complaint in the State of Delaware Court of Chancery, on behalf of the Company and all similarly situated stockholders, against the Company, as the nominal defendant, 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. Pursuant to a court order in August 2013, this matter has been stayed until the outcome of any motion to dismiss in the 10b-5 Cases.
Based on our assessment of the facts underlying these matters described above, we are unable to provide meaningful quantification of how the final resolution of these matters may impact our future consolidated financial condition, results of operations, or cash flows.
Deloitte & Touche LLP
In April 2011, the Company filed a complaint against Deloitte and Touche LLP ("Deloitte"). In December 2012, the parties reached a settlement. As a result of this settlement in the first quarter of 2013, the Company received cash proceeds of $35 million, which were recorded as a gain to Other expense (income), net, in the Company's Consolidated Statements of Operations.
Other
U.S. Securities and Exchange Commission ("SEC") Inquiry
In June 2012, Navistar received an informal inquiry from the Chicago Office of the Enforcement Division of the SEC seeking a number of categories of documents for the periods dating back to November 1, 2010, relating to various accounting and disclosure issues. We received a formal order of private investigation in July 2012. We have received subsequent subpoenas from the SEC in connection with their inquiry, and we continue our full cooperation with the SEC in this matter. At this time, we are unable to predict the outcome of this matter or provide meaningful quantification of how the final resolution of this matter may impact our future consolidated financial condition, results of operations or cash flows.
Non-Conformance Penalties
In January 2012, the EPA promulgated the Interim Final Rule establishing non-conformance penalties ("NCPs") for heavy-duty diesel ("HDD") engines, and we began using NCPs for trucks using certain of our HDD engines in 2012. Also in January 2012, the EPA published a Notice of Proposed Rulemaking for a final NCP rule (the "Final Rule"), which proposed to make NCPs available in model years 2012 and later for emissions of NOx above the 0.20g limit for both medium and heavy HDD engines. The EPA promulgated the Final Rule for heavy HDD engines in September 2012. The Final Rule did not include NCPs for medium HDD engines. On December 11, 2013, the D.C. Circuit Court issued an opinion vacating the Final Rule. On February 10, 2014, the EPA filed a petition for panel rehearing asking the D.C. Circuit to reconsider that portion of its opinion vacating the Final Rule. The EPA's petition is currently pending. However, the Company did not plan to use the NCP rule to certify engines in model year 2014. A challenge to 2013 certificates under the Final Rule remains held in abeyance at the D.C. Circuit Court. In the three months ended January 31, 2014 and 2013, the North America Truck segment recorded charges totaling $2 million and $10 million, respectively, for NCPs for certain engine sales.

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Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

13. Segment Reporting
The following is a description of our four reporting segments:
•
Our North America Truck segment manufactures and distributes Class 4 through 8 trucks, buses, and military vehicles under the International and IC Bus ("IC") brands, along with production of engines under the MaxxForce brand name, in the North America markets that include sales in the U.S., Canada, and Mexico. In an effort to strengthen and maintain our dealer network, this segment occasionally acquires and operates dealer locations for the purpose of transitioning ownership.
•
Our North America Parts segment provides customers with proprietary products needed to support the International commercial and military truck, IC Bus, MaxxForce engine lines, as well as our other product lines. Our North America Parts segment also provides a wide selection of other standard truck, trailer, and engine aftermarket parts. At January 31, 2014, this segment operated eleven regional parts distribution centers that provide 24-hour availability and shipment. Also included in the North America Parts segment are the operating results of BDP, which manages the sourcing, merchandising, and distribution of certain service parts we sell to Ford in North America.
•
Our Global Operations segment includes businesses that derive their revenue from outside our core North America markets and primarily consists of the IIAA (formerly MWM) engine and truck operations in Brazil and our export truck and parts businesses. The IIAA engine operations produce diesel engines, primarily under contract manufacturing arrangements, as well as under the MWM brand, for sale to OEMs in South America.
•
Our Financial Services segment provides retail, wholesale, and lease financing of products sold by the North America Truck and North America Parts segments and their dealers within the U.S. and Mexico, as well as financing for wholesale accounts and selected retail accounts receivable.
Corporate contains those items that are not included in our four segments.
Segment Profit (Loss)
We define segment profit (loss) as Net income (loss) from continuing operations attributable to Navistar International Corporation excluding Income tax benefit (expense). The following tables present selected financial information for our reporting segments:
(in millions)
North America Truck
 
North America Parts
 
Global Operations
 
Financial
Services(A)
 
Corporate
and
Eliminations
 
Total
Three Months Ended January 31, 2014
 
 
 
 
 
 
 
 
 
 
 
External sales and revenues, net
$
1,277

 
$
597

 
$
295

 
$
39

 
$
—

 
$
2,208

Intersegment sales and revenues
88

 
10

 
8

 
16

 
(122
)
 
—

Total sales and revenues, net
$
1,365

 
$
607

 
$
303

 
$
55

 
$
(122
)
 
$
2,208

Income (loss) from continuing operations attributable to NIC, net of tax
$
(207
)
 
$
104

 
$
(33
)
 
$
23

 
$
(136
)
 
$
(249
)
Income tax benefit
—

 
—

 
—

 
—

 
12

 
12

Segment profit (loss)
$
(207
)
 
$
104

 
$
(33
)
 
$
23

 
$
(148
)
 
$
(261
)
Depreciation and amortization
$
58

 
$
4

 
$
8

 
$
10

 
$
6

 
$
86

Interest expense
—

 
—

 
—

 
17

 
65

 
82

Equity in income (loss) of non-consolidated affiliates
1

 
1

 
(2
)
 
—

 
—

 
—

Capital expenditures(B)
12

 
4

 
3

 
1

 
1

 
21


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

(in millions)
North America Truck
 
North America Parts
 
Global Operations
 
Financial
Services(A)
 
Corporate
and
Eliminations
 
Total
Three Months Ended January 31, 2013
 
 
 
 
 
 
 
 
 
 
 
External sales and revenues, net
$
1,538

 
$
669

 
$
391

 
$
39

 
$
—

 
$
2,637

Intersegment sales and revenues
127

 
18

 
15

 
20

 
(180
)
 
—

Total sales and revenues, net
$
1,665

 
$
687

 
$
406

 
$
59

 
$
(180
)
 
$
2,637

Income (loss) from continuing operations attributable to NIC, net of tax
$
(101
)
 
$
117

 
$
(10
)
 
$
22

 
$
(142
)
 
$
(114
)
Income tax expense
—

 
—

 
—

 
—

 
(15
)
 
(15
)
Segment profit (loss)
$
(101
)
 
$
117

 
$
(10
)
 
$
22

 
$
(127
)
 
$
(99
)
Depreciation and amortization
$
71

 
$
4

 
$
9

 
$
9

 
$
7

 
$
100

Interest expense
—

 
—

 
—

 
18

 
56

 
74

Equity in income (loss) of non-consolidated affiliates
2

 
1

 
(4
)
 
—

 
—

 
(1
)
Capital expenditures(B)
65

 
1

 
3

 
—

 
3

 
72

(in millions)
North America Truck
 
North America Parts
 
Global Operations
 
Financial
Services
 
Corporate
and
Eliminations
 
Total
Segment assets, as of:
 
 
 
 
 
 
 
 
 
 
 
January 31, 2014
$
2,309

 
$
701

 
$
994

 
$
2,243

 
$
1,407

 
$
7,654

October 31, 2013
2,250

 
716

 
1,162

 
2,355

 
1,832

 
8,315

_________________________
(A)
Total sales and revenues in the Financial Services segment include interest revenues of $40 million and $47 million for the three months ended January 31, 2014 and 2013, respectively.
(B)
Exclusive of purchases of equipment leased to others.
14. Stockholders' Deficit
October 2012 Issuance of Common Stock
In October 2012, the Company completed a public offering of 10,666,666 shares of NIC common stock at a price of $18.75 per share and received proceeds, net of underwriting discounts, commissions, and offering expenses, of $192 million. In connection with the public offering, in November 2012, the underwriters elected to exercise a portion of an over-allotment option and purchased an additional 763,534 shares of NIC common stock at a price of $18.75 per share. The Company received proceeds from the exercise of the over-allotment, net of underwriting discounts and commissions, of $14 million in the three months ended January 31, 2013.
Accumulated Other Comprehensive Loss
The following table displays the changes in Accumulated other comprehensive loss, net of tax, by component from October 31, 2013 to January 31, 2014:
(in millions)
Foreign Currency Translation Adjustments
 
Defined Benefit Plan
 
Total
Balance as of October 31, 2013
$
(75
)
 
$
(1,749
)
 
$
(1,824
)
Other comprehensive loss before reclassifications
(62
)
 
(1
)
 
(63
)
Amounts reclassified out of accumulated other comprehensive loss
—

 
26

 
26

Net current-period other comprehensive income (loss)
(62
)
 
25

 
(37
)
Balance as of January 31, 2014
$
(137
)
 
$
(1,724
)
 
$
(1,861
)

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

The following table displays the amounts reclassified from Accumulated other comprehensive loss and the affected line item in the Consolidated Statements of Operations:
 
 
Location in Consolidated
Statements of Operations
 
Three months ended January 31, 2014
Defined benefit plans
 
 
 
 
Amortization of prior service costs
 
Selling, general and administrative expenses
 
$
(1
)
Amortization of actuarial loss
 
Selling, general and administrative expenses
 
27

 
 
Total before tax
 
26

 
 
Tax benefit (expense)
 
—

 
 
Net of tax
 
26

 
 
 
 
 
Total reclassifications for the period, net of tax
 
$
26

15. Earnings (Loss) Per Share Attributable to Navistar International Corporation
The following table presents the information used in the calculation of our basic and diluted income (loss) per share for continuing operations, discontinued operations, and net loss, all attributable to Navistar International Corporation:
 
Three months ended January 31,
(in millions, except per share data)
2014
 
2013
Numerator:
 
 
 
Amounts attributable to Navistar International Corporation common stockholders:
 
 
 
Loss from continuing operations, net of tax
$
(249
)
 
$
(114
)
Income (loss) from discontinued operations, net of tax
1

 
(9
)
Net loss
$
(248
)
 
$
(123
)
 
 
 
 
Denominator:
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
81.2

 
80.2

Effect of dilutive securities
—

 
—

Diluted
81.2

 
80.2

 
 
 
 
Earnings (loss) per share attributable to Navistar International Corporation:
 
 
 
Basic:
 
 
 
Continuing operations
$
(3.07
)
 
$
(1.42
)
Discontinued operations
0.02

 
(0.11
)
 
$
(3.05
)
 
$
(1.53
)
Diluted:
 
 
 
Continuing operations
$
(3.07
)
 
$
(1.42
)
Discontinued operations
0.02

 
(0.11
)
 
$
(3.05
)
 
$
(1.53
)
The conversion rate on our 2014 Convertible Notes is 19.891 shares of common stock per $1,000 principal amount of 2014 Convertible Notes, equivalent to an initial conversion price of $50.27 per share of common stock. In connection with the sale of the 2014 Convertible Notes, we sold warrants to various counterparties to purchase shares of our common stock from us at an exercise price of $60.14 per share. The 2014 Convertible Notes and warrants are anti-dilutive when calculating diluted earnings per share when our average stock price is less than $50.27 and $60.14, respectively.
We also purchased call options in connection with the sale of the 2014 Convertible Notes, covering 11.3 million shares at an exercise price of $50.27 per share, which are intended to minimize share dilution associated with the 2014 Convertible Notes; however under accounting guidance, these call options cannot be utilized to offset the dilution of the 2014 Convertible Notes for determining diluted earnings per share as they are anti-dilutive.
The conversion rate on our 4.50% Senior Subordinated Convertible Notes, due 2018 (the "2018 Convertible Notes"), is 17.1233 shares of common stock per $1,000 principal amount of 2018 Convertible Notes, equivalent to an initial conversion price of

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Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

approximately $58.40 per share of common stock. The 2018 Convertible Notes are anti-dilutive when calculating diluted earnings per share when our average stock price is less than $58.40.
The computation of diluted earnings per share also excludes outstanding options and other common stock equivalents in periods where inclusion of such potential common stock instruments would be anti-dilutive.
For the three months ended January 31, 2014 and 2013, no dilutive securities were included in the computation of diluted loss per share since they would have been anti-dilutive due to the net loss attributable to Navistar International Corporation. Additionally, certain securities would have been excluded from the computation of earnings per share, as our average stock price was less than their respective exercise prices. For the three months ended January 31, 2014 and 2013, the aggregate shares not included were 31 million and 28 million, respectively, of which 11.3 million shares were related to the warrants and 11.3 million shares were related to the 2014 Convertible Notes, as well as for the three months ended January 31, 2014, 3.4 million shares were related to the 2018 Convertible Notes.
16. Condensed Consolidating Guarantor and Non-guarantor Financial Information
The following tables set forth condensed consolidating balance sheets as of January 31, 2014 and 2013, and condensed consolidating statements of operations and condensed consolidating statements of comprehensive income (loss) for the three months ended January 31, 2014 and 2013, and condensed consolidating statements of cash flows for the three months ended January 31, 2014 and 2013.
The information is presented as a result of Navistar, Inc.’s guarantee, exclusive of its subsidiaries, of NIC’s indebtedness under our 8.25% Senior Notes, due 2021, and obligations under our Loan Agreement related to the 6.5% Tax Exempt Bonds, due 2040. Navistar, Inc. is a direct wholly-owned subsidiary of NIC. None of NIC’s other subsidiaries guarantee any of these notes or bonds. The guarantees are "full and unconditional", as those terms are used in Regulation S-X Rule 3-10, except that the guarantees will be automatically released in certain customary circumstances, such as when the subsidiary is sold or all of the assets of the subsidiary are sold, the capital stock is sold, when the subsidiary is designated as an "unrestricted subsidiary" for purposes of the respective indenture for each of the 8.25% Senior Notes, due 2021, and the 6.5% Tax Exempt Bonds, due 2040, upon liquidation or dissolution of the subsidiary or upon legal or covenant defeasance, or satisfaction and discharge of the notes. Separate financial statements and other disclosures concerning Navistar, Inc. have not been presented because management believes that such information is not material to investors. Within this disclosure only, "NIC" includes the financial results of the parent company only, with all of its wholly-owned subsidiaries accounted for under the equity method. Likewise, "Navistar, Inc.," for purposes of this disclosure only, includes the consolidated financial results of its wholly-owned subsidiaries accounted for under the equity method and its operating units accounted for on a consolidated basis. "Non-Guarantor Subsidiaries" includes the combined financial results of all other non-guarantor subsidiaries. "Eliminations and Other" includes all eliminations and reclassifications to reconcile to the consolidated financial statements. NIC files a consolidated U.S. federal income tax return that includes Navistar, Inc. and its U.S. subsidiaries. Navistar, Inc. has a tax allocation agreement ("Tax Agreement") with NIC which requires Navistar, Inc. to compute its separate federal income tax liability and remit any resulting tax liability to NIC. Tax benefits that may arise from net operating losses of Navistar, Inc. are not refunded to Navistar, Inc. but may be used to offset future required tax payments under the Tax Agreement. The effect of the Tax Agreement is to allow NIC, the parent company, rather than Navistar, Inc., to utilize current U.S. taxable losses of Navistar, Inc. and all other direct or indirect subsidiaries of NIC.

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

Condensed Consolidating Statement of Operations for the Three Months Ended January 31, 2014
(in millions)
NIC
 
Navistar,
Inc.
 
Non-Guarantor
Subsidiaries
 
Eliminations
and Other
 
Consolidated
Sales and revenues, net
$
—

 
$
1,424

 
$
1,729

 
$
(945
)
 
$
2,208

Costs of products sold
—

 
1,425

 
1,531

 
(942
)
 
2,014

Restructuring charges
—

 
2

 
1

 
—

 
3

Asset impairment charges
—

 
—

 
18

 
—

 
18

All other operating expenses (income)
36

 
241

 
159

 
(11
)
 
425

Total costs and expenses
36

 
1,668

 
1,709

 
(953
)
 
2,460

Equity in income (loss) of affiliates
(212
)
 
(11
)
 
(1
)
 
224

 
—

Income (loss) before income taxes
(248
)
 
(255
)
 
19

 
232

 
(252
)
Income tax benefit
—

 
7

 
5

 
—

 
12

Earnings (loss) from continuing operations
(248
)
 
(248
)
 
24

 
232

 
(240
)
Income from discontinued operations, net of tax
—

 
—

 
1

 
—

 
1

Net income (loss)
(248
)
 
(248
)
 
25

 
232

 
(239
)
Less: Net income attributable to non-controlling interests
—

 
—

 
9

 
—

 
9

Net income (loss) attributable to Navistar International Corporation
$
(248
)
 
$
(248
)
 
$
16

 
$
232

 
$
(248
)
Condensed Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended January 31, 2014
(in millions)
NIC
 
Navistar,
Inc.
 
Non-Guarantor
Subsidiaries
 
Eliminations
and Other
 
Consolidated
Net income (loss) attributable to Navistar International Corporation
$
(248
)
 
$
(248
)
 
$
16

 
$
232

 
$
(248
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(62
)
 
—

 
(62
)
 
62

 
(62
)
Defined benefit plans (net of tax of $0 tax for all entities)
25

 
25

 
—

 
(25
)
 
25

Total other comprehensive income (loss)
(37
)
 
25

 
(62
)
 
37

 
(37
)
Total comprehensive income (loss) attributable to Navistar International Corporation
$
(285
)
 
$
(223
)
 
$
(46
)
 
$
269

 
$
(285
)

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Table of Contents
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Condensed Consolidating Balance Sheet as of January 31, 2014
(in millions)
NIC
 
Navistar,
Inc.
 
Non-Guarantor
Subsidiaries
 
Eliminations
and Other
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
177

 
$
40

 
$
332

 
$
—

 
$
549

Marketable securities
317

 
—

 
313

 
—

 
630

Restricted cash
18

 
4

 
93

 
—

 
115

Finance and other receivables, net
(1
)
 
138

 
2,214

 
(6
)
 
2,345

Inventories
—

 
773

 
621

 
(12
)
 
1,382

Investments in non-consolidated affiliates
(6,375
)
 
6,586

 
72

 
(208
)
 
75

Property and equipment, net
—

 
906

 
790

 
4

 
1,700

Goodwill
—

 
—

 
170

 
—

 
170

Deferred taxes, net
1

 
13

 
215

 
—

 
229

Other
34

 
162

 
267

 
(4
)
 
459

Total assets
$
(5,829
)
 
$
8,622

 
$
5,087

 
$
(226
)
 
$
7,654

Liabilities and stockholders’ equity (deficit)
 
 
 
 
 
 
 
 
 
Debt
$
2,133

 
$
994

 
$
1,741

 
$
(4
)
 
$
4,864

Postretirement benefits liabilities
—

 
2,377

 
243

 
—

 
2,620

Amounts due to (from) affiliates
(7,396
)
 
11,182

 
(3,871
)
 
85

 
—

Other liabilities
3,344

 
632

 
147

 
(76
)
 
4,047

Total liabilities
(1,919
)
 
15,185

 
(1,740
)
 
5

 
11,531

Redeemable equity securities
2

 
—

 
—

 
—

 
2

Stockholders’ equity (deficit) attributable to non-controlling interest
—

 
—

 
33

 
—

 
33

Stockholders’ equity (deficit) attributable to Navistar International Corporation
(3,912
)
 
(6,563
)
 
6,794

 
(231
)
 
(3,912
)
Total liabilities and stockholders’ equity (deficit)
$
(5,829
)
 
$
8,622

 
$
5,087

 
$
(226
)
 
$
7,654

Condensed Consolidating Statement of Cash Flows for the Three Months Ended January 31, 2014
(in millions)
NIC
 
Navistar,
Inc.
 
Non-Guarantor
Subsidiaries
 
Eliminations
and Other
 
Consolidated
Net cash provided by (used in) operations
$
(446
)
 
$
(970
)
 
$
368

 
$
955

 
$
(93
)
Cash flows from investment activities
 
 
 
 
 
 
 
 
 
Net change in restricted cash and cash equivalents
6

 
(1
)
 
(29
)
 
—

 
(24
)
Net sales of marketable securities
264

 
—

 
(64
)
 
—

 
200

Capital expenditures and purchase of equipment leased to others
—

 
(18
)
 
(52
)
 
—

 
(70
)
Other investing activities
—

 
1

 
7

 
—

 
8

Net cash provided by (used in) investment activities
270

 
(18
)
 
(138
)
 
—

 
114

Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Net borrowings (repayments) of debt
1

 
936

 
(204
)
 
(955
)
 
(222
)
Other financing activities
16

 
20

 
(20
)
 
—

 
16

Net cash provided by (used in) financing activities
17

 
956

 
(224
)
 
(955
)
 
(206
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(21
)
 
—

 
(21
)
Decrease in cash and cash equivalents
(159
)
 
(32
)
 
(15
)
 
—

 
(206
)
Cash and cash equivalents at beginning of the period
336

 
72

 
347

 
—

 
755

Cash and cash equivalents at end of the period
$
177

 
$
40

 
$
332

 
$
—

 
$
549


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Table of Contents
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Condensed Consolidating Statement of Operations for the Three Months Ended January 31, 2013
(in millions)
NIC
 
Navistar,
Inc.
 
Non-Guarantor
Subsidiaries
 
Eliminations
and Other
 
Consolidated
Sales and revenues, net
$
—

 
$
1,609

 
$
2,258

 
$
(1,230
)
 
$
2,637

Costs of products sold
—

 
1,595

 
1,909

 
(1,218
)
 
2,286

Restructuring charges
—

 
—

 
2

 
—

 
2

Asset impairment charges
—

 
—

 
—

 
—

 
—

All other operating expenses (income)
21

 
231

 
192

 
(12
)
 
432

Total costs and expenses
21

 
1,826

 
2,103

 
(1,230
)
 
2,720

Equity in income (loss) of affiliates
(102
)
 
54

 
(2
)
 
49

 
(1
)
Income (loss) before income taxes
(123
)
 
(163
)
 
153

 
49

 
(84
)
Income tax expense
—

 
(11
)
 
(4
)
 
—

 
(15
)
Earnings (loss) from continuing operations
(123
)
 
(174
)
 
149

 
49

 
(99
)
Loss from discontinued operations, net of tax
—

 
—

 
(9
)
 
—

 
(9
)
Net income (loss)
(123
)
 
(174
)
 
140

 
49

 
(108
)
Less: Net income attributable to non-controlling interests
—

 
—

 
15

 
—

 
15

Net income (loss) attributable to Navistar International Corporation
$
(123
)
 
$
(174
)
 
$
125

 
$
49

 
$
(123
)
Condensed Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended January 31, 2013
(in millions)
NIC
 
Navistar,
Inc.
 
Non-Guarantor
Subsidiaries
 
Eliminations
and Other
 
Consolidated
Net income (loss) attributable to Navistar International Corporation
$
(123
)
 
$
(174
)
 
$
125

 
$
49

 
$
(123
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
17

 
—

 
17

 
(17
)
 
17

Defined benefit plans (net of tax of no tax for all entities)
38

 
35

 
3

 
(38
)
 
38

Total other comprehensive income (loss)
55

 
35

 
20

 
(55
)
 
55

Total comprehensive income (loss) attributable to Navistar International Corporation
$
(68
)
 
$
(139
)
 
$
145

 
$
(6
)
 
$
(68
)

37
Table of Contents
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

Condensed Consolidating Balance Sheet as of October 31, 2013
(in millions)
NIC
 
Navistar,
Inc.
 
Non-Guarantor
Subsidiaries
 
Eliminations
and Other
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
336

 
$
72

 
$
347

 
$
—

 
$
755

Marketable securities
581

 
1

 
248

 
—

 
830

Restricted cash
23

 
3

 
65

 
—

 
91

Finance and other receivables, net
3

 
148

 
2,561

 
(11
)
 
2,701

Inventories
—

 
621

 
608

 
(19
)
 
1,210

Investments in non-consolidated affiliates
(6,123
)
 
6,600

 
73

 
(473
)
 
77

Property and equipment, net
—

 
937

 
807

 
(3
)
 
1,741

Goodwill
—

 
—

 
184

 
—

 
184

Deferred taxes, net
—

 
13

 
219

 
(1
)
 
231

Other
36

 
156

 
304

 
(1
)
 
495

Total assets
$
(5,144
)
 
$
8,551

 
$
5,416

 
$
(508
)
 
$
8,315

Liabilities and stockholders’ equity (deficit)
 
 
 
 
 
 
 
 
 
Debt
$
2,125

 
$
1,002

 
$
1,960

 
$
(2
)
 
$
5,085

Postretirement benefits liabilities
—

 
2,407

 
245

 
—

 
2,652

Amounts due to (from) affiliates
(6,988
)
 
10,846

 
(3,932
)
 
74

 
—

Other liabilities
3,362

 
646

 
250

 
(79
)
 
4,179

Total liabilities
(1,501
)
 
14,901

 
(1,477
)
 
(7
)
 
11,916

Redeemable equity securities
4

 
—

 
—

 
—

 
4

Stockholders’ equity (deficit) attributable to non-controlling interest
—

 
—

 
44

 
—

 
44

Stockholders’ equity (deficit) attributable to Navistar International Corporation
(3,647
)
 
(6,350
)
 
6,849

 
(501
)
 
(3,649
)
Total liabilities and stockholders’ equity (deficit)
$
(5,144
)
 
$
8,551

 
$
5,416

 
$
(508
)
 
$
8,315

Condensed Consolidating Statement of Cash Flows for the Three Months Ended January 31, 2013
(in millions)
NIC
 
Navistar,
Inc.
 
Non-Guarantor
Subsidiaries
 
Eliminations
and Other
 
Consolidated
Net cash provided by (used in) operations
$
(342
)
 
$
(531
)
 
$
297

 
$
642

 
$
66

Cash flows from investment activities
 
 
 
 
 
 
 
 
 
Net change in restricted cash and cash equivalents
—

 
(1
)
 
60

 
—

 
59

Net sales of marketable securities
(242
)
 
—

 
(63
)
 
—

 
(305
)
Capital expenditures and purchase of equipment leased to others
—

 
(62
)
 
(42
)
 
—

 
(104
)
Other investing activities
—

 
—

 
3

 
—

 
3

Net cash used in investment activities
(242
)
 
(63
)
 
(42
)
 
—

 
(347
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Net borrowings (repayments) of debt
21

 
589

 
(273
)
 
(642
)
 
(305
)
Other financing activities
15

 
—

 
(13
)
 
—

 
2

Net cash provided by (used in) financing activities
36

 
589

 
(286
)
 
(642
)
 
(303
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(6
)
 
—

 
(6
)
Decrease in cash and cash equivalents
(548
)
 
(5
)
 
(37
)
 
—

 
(590
)
Cash and cash equivalents at beginning of the period
702

 
55

 
330

 
—

 
1,087

Cash and cash equivalents at end of the period
$
154

 
$
50

 
$
293

 
$
—

 
$
497


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Table of Contents

Item 2.
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 contained in our Annual Report on Form 10-K for the year ended October 31, 2013. 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 from items disclosed within the MD&A of our Annual Report on Form 10-K for the year ended October 31, 2013 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. Operating results for interim reporting periods are not necessarily indicative of annual operating results.
Executive Overview
Navistar is an international manufacturer of International® brand commercial and military trucks, MaxxForce® 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 "Traditional" markets). We also provide retail, wholesale, and lease financing services for our trucks and parts.
We operate in four reporting segments: North America Truck, North America 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").
First Quarter Summary
We continue to experience operational challenges, but we believe we are taking the necessary actions to improve our future performance. Also, we 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 continue to execute our "Drive-to-Deliver" turnaround plan, which includes the continued review of our proprietary engine business. In this regard, in February 2014, we announced that we will consolidate our mid-range engine manufacturing footprint and relocate mid-range engine production from our Huntsville Facility to our Melrose Park Facility. In addition, we plan to incorporate the SCR after-treatment system with the MaxxForce 9- and 10-liter engines, but do not expect to do so in relation to the MaxxForce DT engine.
We met our first quarter product launch target with the launch of the International® DuraStar® vehicles with the Cummins ISB 6.7-liter engine in December 2013. In the first quarter of 2014, orders received in our Traditional markets were up 15% compared to the prior year quarter. Also in January 2014 at the American Truck Dealers Convention and Exposition in New Orleans, the International® ProStar® with Cummins ISX15 engine was named "2014 Heavy-Duty Commercial Truck of the Year" and the International® TerraStar® 4x4 was named "2014 Medium-Duty Commercial Truck of the Year."
Financial Summary
In the first quarter of 2014, our consolidated net sales and revenues were $2.2 billion, which was a decrease of 16% compared to the first quarter of 2013 and reflects lower net sales in all reporting segments. This decrease was primarily due to the impact of the transition of our engine strategy in our Traditional markets and lower military sales. The decrease in our military sales reflects lower chargeouts, upgrade kits, and service revenue, which resulted from lower demand for our military products as a result of U.S. government budgetary constraints.
The loss from continuing operations before income taxes was $252 million in the first quarter of 2014, compared to $84 million in the first quarter of 2013. The decline in our comparative results was primarily driven by the impacts of the declines in our consolidated net sales and revenues, partially offset by lower Selling, general and administrative ("SG&A") expenses and Engineering and product development costs. During this period of lower sales volumes, we have successfully reduced our SG&A expenses by 16% and our Engineering and product development costs by 19%. Partially offsetting these improvements in the first quarter of 2014 were: (i) asset impairment charges of $18 million, (ii) higher interest expense of $8 million, and (iii) unfavorable impact of fluctuations of foreign exchange rates of $21 million. Also contributing to the year-over-year change was a gain of $35 million from a legal settlement in the first quarter of 2013.
We recognized an Income tax benefit from continuing operations of $12 million in the first quarter of 2014, compared to expense of $15 million in the first quarter of 2013. After income taxes, the loss from continuing operations attributable to

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Table of Contents

Navistar International Corporation was $249 million, or $3.07 per diluted share, in the first quarter of 2014, compared to a loss of $114 million, or $1.42 per diluted share, in the first quarter of 2013.
We ended the first quarter of 2014 with $1.18 billion of consolidated cash, cash equivalents and marketable securities, compared to $1.59 billion as of October 31, 2013. The decrease in consolidated cash, cash equivalents and marketable securities was primarily attributable to spending related to warranty claims, debt servicing payments, contributions to our benefit plan, and capital expenditures.
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 quarter ended January 31, 2014 as compared to the quarter ended January 31, 2013
 
Three Months Ended January 31,
 
 
 
%
Change
(in millions, except per share data and % change)
2014
 
2013
 
Change
 
Sales and revenues, net
$
2,208

 
$
2,637

 
$
(429
)
 
(16
)%
Costs of products sold
2,014

 
2,286

 
(272
)
 
(12
)%
Restructuring charges
3

 
2

 
1

 
50
 %
Asset impairment charges
18

 
—

 
18

 
N.M.

Selling, general and administrative expenses
239

 
285

 
(46
)
 
(16
)%
Engineering and product development costs
90

 
111

 
(21
)
 
(19
)%
Interest expense
82

 
74

 
8

 
11
 %
Other expense (income), net
14

 
(38
)
 
52

 
N.M.

Total costs and expenses
2,460

 
2,720

 
(260
)
 
(10
)%
Equity in income (loss) of non-consolidated affiliates
—

 
(1
)
 
1

 
(100
)%
Loss from continuing operations before income taxes
(252
)
 
(84
)
 
(168
)
 
200
 %
Income tax benefit (expense)
12

 
(15
)
 
27

 
N.M.

Loss from continuing operations
(240
)
 
(99
)
 
(141
)
 
142
 %
Less: Net income attributable to non-controlling interests
9

 
15

 
(6
)
 
(40
)%
Loss from continuing operations(A)
(249
)
 
(114
)
 
(135
)
 
118
 %
Income (loss) from discontinued operations, net of tax
1

 
(9
)
 
10

 
N.M.

Net loss(A)
$
(248
)
 
$
(123
)
 
$
(125
)
 
102
 %
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:(A)
 
 
 
 
 
 
 
Continuing operations
$
(3.07
)
 
$
(1.42
)
 
$
(1.65
)
 
116
 %
Discontinued operations
0.02

 
(0.11
)
 
0.13

 
(118
)%
 
$
(3.05
)
 
$
(1.53
)
 
$
(1.52
)
 
99
 %
Diluted weighted average shares outstanding
81.2

 
80.2

 
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:
 
Three Months Ended January 31,
 
 
 
%
Change
(in millions, except % change)
2014
 
2013
 
Change
 
North America Truck
$
1,365

 
$
1,665

 
$
(300
)
 
(18
)%
North America Parts
607

 
687

 
(80
)
 
(12
)%
Global Operations
303

 
406

 
(103
)
 
(25
)%
Financial Services
55

 
59

 
(4
)
 
(7
)%
Corporate and Eliminations
(122
)
 
(180
)
 
58

 
(32
)%
Total
$
2,208

 
$
2,637

 
$
(429
)
 
(16
)%

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Table of Contents

The North America Truck segment net sales decrease of $300 million, or 18%, compared to the prior year period, was primarily due to decreased truck sales volumes in our Traditional market, reflecting the impact of the transition of our engine strategy, and lower military sales, reflecting lower chargeouts and service revenue.
The North America Parts segment net sales decrease of $80 million, or 12%, was primarily due to lower military sales, reflecting lower sales of upgrade kits.
The Global Operations segment net sales decrease of $103 million, or 25%, was primarily due to lower engine volumes and the unfavorable impact of foreign currency in our South America engine operations, as well as lower chargeouts in our export truck sales.
The Financial Services segment net revenues decrease of $4 million, or 7%, was primarily driven by a decline in the average finance receivable balance, partially offset by higher revenues from operating leases.
Costs of products sold
Consistent with the declines in net sales and revenues, Cost of products sold decreased by $272 million compared to the prior year period. The impact on Costs of products sold from the lower net sales in our Manufacturing operations included lower chargeouts, partially offset by a shift in our Traditional market to a greater mix of higher cost units that incorporate the Cummins SCR after-treatment system.
Asset impairment charges
In the first quarter of 2014, the North America Truck segment recorded Asset impairment charges of $18 million, which were the result of a triggering event related to potential sales of assets that resulted from 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 SG&A expenses decrease of $46 million reflects the impact of our cost-reduction initiatives. Additionally, in the fourth quarter of 2013, the Company leveraged efficiencies identified through redesigning our organizational structure and began implementing new cost-reduction initiatives, including an enterprise-wide reduction-in-force. 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 $21 million is primarily due to project rationalization of certain engineering programs and other savings from our cost-reduction initiatives. These decreases were partially offset by costs to integrate the Cummins SCR after-treatment systems with certain engine models, as well as efforts to rationalize the content in our MaxxForce 13L engine.
Interest expense
The Interest expense increase of $8 million was primarily due to the increase in our average outstanding debt balances during the first quarter of 2014 compared to the first quarter of 2013. The change in our average outstanding debt balances was primarily the result of the issuance of additional 8.25% Senior Notes, due 2021, in March 2013 and the private sale of the 4.50% Senior Subordinated Convertible Notes, due 2018, in October 2013, partially offset by the principal payment of $300 million against the Senior Secured Term Loan Credit Facility in April 2013.
Other expense (income), net
We recognized Other net expense of $14 million in the first quarter of 2014 compared to Other net income of $38 million in 2013. In the first quarter of 2014, the Other net expense was primarily due to an unfavorable impact of $21 million due to fluctuations in foreign exchange rates, particularly in the Global Operations segment due to the weakening of the Brazilian Real against the U.S. Dollar, as well as in Corporate and Eliminations due to the weakening of the Canadian Dollar against the U.S. Dollar.
The Other net income in the first quarter of 2013 is largely due to a $35 million gain related to our legal settlement with Deloitte and Touche LLP. For more information, see Note 12, Commitments and Contingencies, to the accompanying consolidated financial statements.
Income tax benefit (expense)
In the first quarter of 2014, we recognized an Income tax benefit from continuing operations of $12 million, compared to expense of $15 million in 2013. While both periods reflect losses, the change in the geographical mix of earnings and losses and the impact of certain discrete items resulted in a benefit in the first quarter of 2014 compared to an expense in the first

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quarter of 2013. 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. and certain foreign deferred tax assets.
At October 31, 2013, we had $1.7 billion of U.S. federal net operating losses and $242 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 carry forward periods of up to 20 years. 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. 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 9, 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 our Blue Diamond Parts ("BDP") subsidiary.
Income (loss) from discontinued operations, net of tax
In the first quarter of 2014, we incurred income from discontinued operations of $1 million compared to a loss of $9 million in the first quarter of 2013, 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. For more information, see Note 2, Discontinued Operations and Other Divestitures, to the accompanying consolidated financial statements.
Segment Results of Continuing Operations
We define segment profit (loss) as net income (loss) from continuing operations attributable to Navistar International Corporation 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 13, Segment Reporting, to the accompanying consolidated financial statements.
North America Truck Segment
 
Three months ended January 31,
 
 
 
%
Change  
(in millions, except % change)
2014
 
2013
 
Change
 
North America Truck segment sales, net
$
1,365

 
$
1,665

 
$
(300
)
 
(18
)%
North America Truck segment loss
(207
)
 
(101
)
 
(106
)
 
105
 %
Segment sales
The North America Truck segment net sales decrease of $300 million, or 18%, was primarily due to lower Traditional truck volumes and military sales. The decrease in our Traditional market truck sales volumes reflects the impact of transition of our engine strategy. The decrease in our military sales reflects lower chargeouts and service revenue, which resulted from lower demand for our military products as a result of U.S. government budgetary constraints. Chargeouts from our Traditional market were down 12%, reflecting declines in all truck classes, primarily Class 6 and 7 medium trucks and Class 8 severe service trucks.
Segment loss
The increase in the North America Truck segment loss was primarily driven by a $117 million decrease in gross margin as a result of the decrease in net sales, reflecting the impact of the transition in our engine emission strategy and the under-absorption of fixed costs. The decrease in margins was primarily due to a shift to a greater mix of higher cost units that incorporate the Cummins SCR after-treatment system.
Additionally, the segment incurred asset impairment charges of $18 million, which were the result of a triggering event related to potential sales of assets that resulted from our ongoing evaluation of our portfolio of assets to validate their strategic and financial fit. In the first quarter of 2013, the segment also recognized charges of $25 million for accelerated depreciation of certain assets, primarily related to the closure of our Garland, Texas truck manufacturing facility and the discontinuation of certain engine programs, particularly the MaxxForce15L engine. For more information, see Note 3, Restructurings and Impairments, to the accompanying consolidated financial statements.

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In the first quarter of 2014 and 2013, the segment recorded charges of $2 million and $10 million, respectively, for non-conformance penalties ("NCPs"), primarily for certain pre-engine model year 2014 13L engines sales. For more information, see Note 12, Commitments and Contingencies, to the accompanying consolidated financial statements.
Offsetting these factors were declines in SG&A expenses and Engineering and product development costs. The lower SG&A expenses reflect the impact of our cost-reduction initiatives. The lower Engineering and product development costs were primarily due to project rationalization of certain engineering programs and other savings from cost-reduction initiatives, partially offset by costs to integrate the Cummins SCR after-treatment systems with certain engine models, as well as efforts to rationalize the content in our MaxxForce 13L engine.
North America Parts Segment
 
Three Months Ended January 31,
 
 
 
%
Change  
(in millions, except % change)
2014
 
2013
 
Change
 
North America Parts segment sales, net
$
607

 
$
687

 
$
(80
)
 
(12
)%
North America Parts segment profit
104

 
117

 
(13
)
 
(11
)%
Segment sales
The North America Parts segment net sales decrease of $80 million, or 12%, was primarily due to lower military sales, reflecting lower sales of upgrade kits, and, to a lesser extent, lower sales from our BDP operations.
Segment profit
The decrease in North America Parts segment profit of $13 million was primarily driven by a $29 million decrease in gross margin as a result of the decrease in net sales, partially offset by lower SG&A expenses due to the impact of our cost-reduction initiatives. Additionally, the North America Parts segment was allocated lower intercompany "access fees," which consist of certain engineering and product development costs, depreciation expense, and SG&A from the North America Truck segment.
Global Operations Segment
 
Three Months Ended January 31,
 
 
 
%
Change  
(in millions, except % change)
2014
 
2013
 
Change
 
Global Operations segment sales, net
$
303

 
$
406

 
$
(103
)
 
(25
)%
Global Operations segment loss
(33
)
 
(10
)
 
(23
)
 
230
 %
Segment sales
The Global Operations segment net sales decrease of $103 million, or 25%, which included a decrease of $62 million in our South America engine operations, primarily due to lower volumes and the unfavorable impact of fluctuations in foreign exchange rates, and $53 million due to lower chargeouts in our export truck sales.
Segment loss
The increase in the Global Operations segment loss was primarily driven by a $21 million decrease in gross margin as a result of the decrease in net sales and the unfavorable impact of fluctuations in foreign exchange rates primarily from our South American engine operations.
Financial Services Segment
 
Three Months Ended January 31,
 
 
 
%
Change  
(in millions, except % change)
2014
 
2013
 
Change
 
Financial Services segment revenues, net
$
55

 
$
59

 
$
(4
)
 
(7
)%
Financial Services segment profit
23

 
22

 
1

 
5
 %
Segment revenues
The Financial Services segment net revenues decrease of $4 million, or 7%, was primarily driven by a decline in the average finance receivables balance, partially offset by higher revenues from operating leases. The decline in the average finance receivables balance reflects lower loan originations in the U.S., partially offset by higher loan originations in Mexico.

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Segment profit
The Financial Services segment profit was comparable to the prior year quarter, reflecting higher interest income from intercompany loans, offset by the lower net financial margin due to the decline in the average finance receivables balance in the U.S., as well as an increase in the provision for loan losses related to the increase in average finance receivables balance in Mexico.
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 North America Truck and Global Operations segments. We define our Traditional markets to include U.S. and Canada School bus and Class 6 through 8 medium and heavy trucks.
Truck Industry Retail Deliveries
The following table summarizes approximate industry retail deliveries, for our Traditional truck market, categorized by relevant class, according to Wards Communications and R.L. Polk & Co. ("Polk"):
 
Three Months Ended January 31,
 

 
 
(in units)
2014
 
2013
 
Change  
 
% Change  
Traditional Markets (U.S. and Canada)
 
 
 
 
 
 
 
School buses
5,300

 
5,000

 
300

 
6
 %
Class 6 and 7 medium trucks
15,700

 
14,300

 
1,400

 
10
 %
Class 8 heavy trucks
42,600

 
41,300

 
1,300

 
3
 %
Class 8 severe service trucks
12,100

 
10,900

 
1,200

 
11
 %
Total Traditional markets
75,700

 
71,500

 
4,200

 
6
 %
Combined Class 8 trucks
54,700

 
52,200

 
2,500

 
5
 %
Navistar Traditional retail deliveries
12,100

 
12,800

 
(700
)
 
(5
)%
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:
 
Three Months Ended
 
January 31, 2014
 
October 31, 2013
 
July 31, 2013
 
April 30, 2013
 
January 31, 2013
Traditional Markets (U.S. and Canada)
 

 
 

 
 
 
 
 
 
Class 6 and 7 medium trucks
17
%
 
20
%
 
24
%
 
26
%
 
25
%
Class 8 heavy trucks
12
%
 
14
%
 
12
%
 
12
%
 
11
%
Class 8 severe service trucks
19
%
 
20
%
 
18
%
 
22
%
 
26
%
Combined Class 8 trucks
14
%
 
16
%
 
14
%
 
15
%
 
14
%
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, buses, and military vehicles. 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 Traditional units:

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Three Months Ended January 31,
 

 
 
(in units)
2014
 
2013
 
Change
 
% Change
Traditional Markets (U.S. and Canada)
 
 
 
 
 
 
 
School buses
2,300

 
1,500

 
800

 
53
 %
Class 6 and 7 medium trucks
4,300

 
3,300

 
1,000

 
30
 %
Class 8 heavy trucks
5,600

 
5,800

 
(200
)
 
(3
)%
Class 8 severe service trucks
2,200

 
1,900

 
300

 
16
 %
Total Traditional markets
14,400

 
12,500

 
1,900

 
15
 %
Combined Class 8 trucks
7,800

 
7,700

 
100

 
1
 %
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 Traditional units:
 
January 31, 2014
 
 
 
 
(in units)
2014
 
2013
 
Change
 
% Change
Traditional Markets (U.S. and Canada)
 
 
 
 
 
 
 
School buses
3,300

 
1,700

 
1,600

 
94
%
Class 6 and 7 medium trucks
5,600

 
3,100

 
2,500

 
81
%
Class 8 heavy trucks
10,100

 
7,000

 
3,100

 
44
%
Class 8 severe service trucks(A)
2,200

 
1,800

 
400

 
22
%
Total Traditional markets
21,200

 
13,600

 
7,600

 
56
%
Combined Class 8 trucks
12,300

 
8,800

 
3,500

 
40
%
_____________________________
(A)
The units in the first quarter of 2013 have been recast to exclude militarized units.
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:
 
Three Months Ended January 31,
 

(in units)
2014
 
2013
 
Change  
 
% Change
Traditional Markets (U.S. and Canada)
 
 
 
 
 
 
 
School buses
1,900

 
2,000

 
(100
)
 
(5
)%
Class 6 and 7 medium trucks
3,200

 
4,100

 
(900
)
 
(22
)%
Class 8 heavy trucks
4,500

 
4,600

 
(100
)
 
(2
)%
Class 8 severe service trucks
1,900

 
2,400

 
(500
)
 
(21
)%
Total Traditional markets
11,500

 
13,100

 
(1,600
)
 
(12
)%
Military vehicles(A)
—

 
300

 
(300
)
 
(100
)%
Expansion markets(B)
5,500

 
6,600

 
(1,100
)
 
(17
)%
Total worldwide units(C)
17,000

 
20,000

 
(3,000
)
 
(15
)%
Combined Class 8 trucks
6,400

 
7,000

 
(600
)
 
(9
)%
_____________________________
(A)
The units in the first quarter of 2013 have been recast to include all militarized units.
(B)
Includes chargeouts related to Blue Diamond Truck ("BDT") of 2,400 units and 2,300 units during the first quarter of 2014 and 2013, respectively.
(C)
In the first quarter of 2013, chargeouts excludes: (i) 400 RV towables units, which was related to the Bison Coach trailer business sold in October 2013, and (ii) 200 units related to Monaco and WCC, both of which have been classified as discontinued operations.

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Engine Shipments
 
Three Months Ended January 31,
 

 
 
(in units)
2014
 
2013
 
Change  
 
% Change  
OEM sales-South America
21,700

 
25,700

 
(4,000
)
 
(16
)%
Intercompany sales
9,500

 
16,400

 
(6,900
)
 
(42
)%
Other OEM sales
1,500

 
1,900

 
(400
)
 
(21
)%
Total sales
32,700

 
44,000

 
(11,300
)
 
(26
)%
Liquidity and Capital Resources
 
As of
(in millions)
January 31, 2014
 
October 31, 2013
 
January 31, 2013
Consolidated cash and cash equivalents
$
549

 
$
755

 
$
497

Consolidated marketable securities
630

 
830

 
771

Consolidated cash, cash equivalents and marketable securities
$
1,179

 
$
1,585

 
$
1,268

Cash Requirements
We generate cash flow from the sale of trucks, diesel engines, and parts, as well as from product financing provided to our dealers and retail customers by our Financial Services operations. It is our opinion that, in the absence of significant extraordinary cash demands, our: (i) level of cash, cash equivalents, and marketable securities, and (ii) current and forecasted cash flow from our Manufacturing operations, Financial Services operations, and financing capacities, will provide sufficient funds to meet operating requirements, capital expenditures, equity investments, and financial obligations during the next twelve months. We also believe that collections on our outstanding receivables portfolios, as well as funds available from various funding sources, will permit our Financial Services operations to meet the financing requirements of our dealers.
Our Manufacturing operations are generally able to access sufficient sources of financing to support our business plan. In August 2012, NIC and Navistar, Inc. signed a definitive credit agreement relating to a senior secured, term loan credit facility in an aggregate principal amount of $1 billion (the "Term Loan Credit Facility") and borrowed an aggregate principal amount of $1 billion under the Term Loan Credit Facility. In conjunction with the Term Loan Credit Facility transaction, we used a portion of the proceeds from the Term Loan Credit Facility to repay all of the borrowings under Navistar, Inc.'s existing Asset-Based Credit Facility and Navistar, Inc. entered into an Amended and Restated Asset-Based Credit Facility with a commitment amount of up to $175 million. During the second quarter of 2013, we amended our Term Loan Credit Facility whereby we lowered our interest rate and extended the maturity date to August 17, 2017. We also utilized proceeds from the March 2013 issuance of $300 million of additional 8.25% Senior Notes due 2021 to make a principal repayment of $300 million against our Term Loan Credit Facility.
In October 2013, we completed the private sale of $200 million of 2018 Convertible Notes, from which the Company received proceeds of $196 million, net of issuance costs and issuance discount. Also in October 2013, our Financial Services operations made an intercompany loan of $270 million to our Manufacturing operations, utilizing existing credit facilities (the "Intercompany Loan"). The Company expects to use the proceeds from the 2018 Convertible Notes for general corporate purposes, which, together with the Intercompany Loan, may include the repayment of the $570 million of 2014 Convertible Notes.
In October 2012, the Company completed a public offering of NIC common stock and received proceeds of $192 million, net of underwriting discounts, commissions, and offering expenses. In connection with the public offering, in November 2012, the underwriters elected to exercise a portion of an over-allotment option, through which the Company received additional net proceeds of $14 million in the first quarter of 2013.
Consolidated cash, cash equivalents and marketable securities was $1.18 billion at January 31, 2014, which includes $65 million of cash and cash equivalents attributable to BDT and BDP, as well as an immaterial amount of cash and cash equivalents of certain VIEs that is generally not available to satisfy our obligations. For additional information on the consolidation of BDT and BDP, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.

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Cash Flow Overview 
 
Three months ended January 31, 2014
(in millions)
Manufacturing
Operations
 
Financial Services Operations and Adjustments
 
Condensed Consolidated Statement of Cash Flows
Net cash provided by (used in) operating activities
$
(368
)
 
$
275

 
$
(93
)
Net cash provided by (used in) investing activities
169

 
(55
)
 
114

Net cash used in financing activities
(3
)
 
(203
)
 
(206
)
Effect of exchange rate changes on cash and cash equivalents
(22
)
 
1

 
(21
)
Increase (decrease) in cash and cash equivalents
(224
)
 
18

 
(206
)
Cash and cash equivalents at beginning of the period
727

 
28

 
755

Cash and cash equivalents at end of the period
$
503

 
$
46

 
$
549


Three months ended January 31, 2013
(in millions)
Manufacturing
Operations

Financial Services Operations and Adjustments

Condensed Consolidated Statement of Cash Flows
Net cash provided by (used in) operating activities
$
(203
)

$
269


$
66

Net cash provided by (used in) investing activities
(376
)

29


(347
)
Net cash used in financing activities
(37
)

(266
)

(303
)
Effect of exchange rate changes on cash and cash equivalents
(5
)

(1
)

(6
)
Increase (decrease) in cash and cash equivalents
(621
)

31


(590
)
Cash and cash equivalents at beginning of the period
1,059


28


1,087

Cash and cash equivalents at end of the period
$
438


$
59


$
497

_____________________
Manufacturing operations cash flows and Financial Services operations cash flows are not in accordance with, or an alternative for, GAAP. This non-GAAP financial information should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. However, we believe that non-GAAP reporting, giving effect to the adjustments shown in the reconciliation above, provides meaningful information and therefore we use it to supplement our U.S. GAAP reporting by identifying items that may not be related to the core manufacturing business. Management often uses this information to assess and measure the performance and liquidity of our operating segments. Our Manufacturing operations, for this purpose, include our North America Truck segment, Global Operations segment, North America Parts segment, and Corporate items which include certain eliminations. The reconciling differences between these non-GAAP financial measures and our U.S. GAAP consolidated financial statements in Item 1, Financial Statements and Supplementary Data, are our Financial Services operations and adjustments required to eliminate certain intercompany transactions between Manufacturing operations and Financial Services operations. Our Financial Services operations cash flows are presented consistent with their treatment in our Condensed Consolidated Statements of Cash Flows and may not be consistent with how they would be treated on a stand-alone basis. We have chosen to provide this supplemental information to allow additional analyses of operating results, to illustrate the respective cash flows giving effect to the non-GAAP adjustments shown in the above reconciliation and to provide an additional measure of performance and liquidity.
Manufacturing Operations
Manufacturing Cash Flow from Operating Activities
Cash used in operating activities was $368 million and $203 million in the three months ended January 31, 2014 and 2013, respectively. The net increase in cash used in the first three months of 2014, versus the comparable period in 2013, was primarily attributable to lower income and changes in inventory, partially offset by changes in accounts receivable, accounts payable and other current liabilities.
Cash paid for interest, net of amounts capitalized, was $64 million and $56 million in the three months ended January 31, 2014 and 2013, respectively.
Manufacturing Cash Flow from Investing Activities
Cash provided by investing activities was $169 million in the three months ended January 31, 2014, compared to cash used of $376 million in the same period of 2013. The net increase in cash provided in the first three months of 2014 was primarily attributable to lower purchases and higher sales of marketable securities, partially offset by lower capital expenditures.
Manufacturing Cash Flow from Financing Activities
Cash used in financing activities was $3 million and $37 million in the three months ended January 31, 2014 and 2013, respectively. The net improvement in cash used in financing activities was primarily attributable to lower principal payments under capital lease obligations and higher proceeds from the exercise of stock options by employees, partially offset by principal payments on long-term debt and lower proceeds from the issuance of long-term debt.

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Financial Services Operations
Financial Services and Adjustments Cash Flow from Operating Activities
Cash provided by operating activities was $275 million and $269 million in the three months ended January 31, 2014 and 2013, respectively. The net increase in cash provided by operating activities was primarily due to the higher margin by which wholesale notes liquidations exceeded originations, partially offset by a decline in liquidations from retail notes receivables.
Cash paid for interest, net of amounts capitalized, remained constant at $14 million in the three month period ended January 31, 2014 and 2013. A decrease in finance receivables funding requirements was largely offset by the funding of the Intercompany Loan, and average interest rates remained constant.
Financial Services and Adjustments Cash Flow from Investing Activities
Cash used in investing activities was $55 million in the three months ended January 31, 2014, compared to cash provided of $29 million in the same period of 2013. Changes in restricted cash levels required under our secured borrowings were the primary uses and sources of cash from investing activities in 2014 and 2013. In 2014, additional restricted cash was used to secure new borrowings of our Mexican financial services operation. In 2013, restricted cash declined as U.S. retail securitization balances declined.
Financial Services and Adjustments Cash Flow from Financing Activities
Cash used in financing activities was $203 million and $266 million in the three months ended January 31, 2014 and 2013, respectively. The decrease in cash used in financing activities is primarily due to the lower margin by which periodic payments on our funding facilities exceeded new funding requirements.
Pension and Other Postretirement Benefits
The Company’s pension plans are funded by contributions made from Company assets in accordance with applicable U.S. and Canadian government regulations. The regulatory funding requirements are computed using an actuarially determined funded status, which is determined using assumptions that often differ from assumptions used to measure the funded status for U.S. GAAP. U.S. funding targets are determined by rules promulgated under the Pension Protection Act ("PPA"). The PPA additionally requires underfunded plans to achieve 100% funding over a period of time. From time to time, we have discussions with and receive requests for certain information from the Pension Benefit Guaranty Corporation ("PBGC"). The PBGC was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of private-sector defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum. In July 2012, the Moving Ahead for Progress in the 21st Century Act was signed into law, impacting the minimum funding requirements for pension plans, but does not otherwise impact our accounting for pension benefits.
Generally, our pension plans are funded by contributions made by us. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time.
For the three months ended January 31, 2014 and 2013, we contributed $29 million and $27 million, respectively, to our U.S. and Canadian pension plans (the "Plans") to meet regulatory minimum funding requirements. We currently anticipate additional contributions of approximately $169 million during the remainder of 2014. Future contributions are dependent upon a number of factors, principally the changes in values of plan assets, changes in interest rates, the impact of any funding relief currently under consideration, and the impact of funding resulting from the closure of our Chatham plant. We currently expect that from 2015 through 2017, the Company will be required to contribute at least $174 million per year to the plans, depending on asset performance and discount rates.
For more information, see Note 8, Postretirement Benefits, to the accompanying consolidated financial statements.
Other Information
Impact of Environmental Regulation
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 National Highway Traffic Safety Administration issued final rules for greenhouse gas emissions and fuel economy on September 15, 2011. These begin to apply 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 plans to comply with these rules through use of existing technologies and implementation of emerging technologies as they become available. Several of the Company's vehicles have been certified early for the 2013 model year with the remaining vehicles and

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all engines required to be certified in 2014. The next phase of federal greenhouse gas emission and fuel economy regulations, anticipated for 2020, is also under discussion among the relevant agencies, manufacturers, including the Company, and other stakeholders. Canada adopted its version of fuel economy and/or greenhouse gas emission regulations in February 2013. These regulations are substantially aligned with U.S. fuel economy and greenhouse gas emission regulations. California is also in the initial stages of considering greenhouse gas emission rules for heavy duty vehicles. We expect that heavy duty vehicle and engine fuel economy and greenhouse gas 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.
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.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our consolidated financial statements, we use estimates and make judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. Our assumptions, estimates, and judgments are based on historical experience, current trends, and other factors we believe are relevant at the time we prepare our consolidated financial statements.
Our significant accounting policies and critical accounting estimates are consistent with those discussed in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements and the MD&A section of our Annual Report on Form 10-K for the year ended October 31, 2013. During the three months ended January 31, 2014, there were no significant changes in our application of our critical accounting policies.
To aid in fully understanding and evaluating our reporting results, we have identified the following accounting policies as our most critical because they require us to make difficult, subjective, and complex judgments.
•
Pension and Other Postretirement Benefits
•
Allowance for Doubtful Accounts
•
Income Taxes
•
Impairment of Long-Lived Assets
•
Goodwill
•
Indefinite-Lived Intangible Assets
•
Contingency Accruals
Recently Issued and Adopted Accounting Standards
There are no recently issued accounting standards for which the Company expects a material impact on our financial statements. In addition, for the three months ended January 31, 2014, the Company has not adopted any new accounting guidance that has had a material impact on our consolidated financial statements.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended October 31, 2013. During the three months ended January 31, 2014, there have been no significant changes in our exposure to market risk.
Item 4.    Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
As previously disclosed under “Item 9A-Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended October 31, 2013, we concluded that our disclosure controls and procedures were not effective as of October 31, 2013

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due to two material weaknesses in our internal control over financial reporting described below. Based on those material weaknesses, which we continue to work to remediate and view as an integral part of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended January 31, 2014, our disclosure controls and procedures were not effective. In light of the weaknesses in internal control over financial reporting, prior to filing our Annual Report on Form 10-K for our fiscal year ended October 31, 2013, and prior to filing this Quarterly Report on Form 10-Q, we completed substantive procedures, including, validating, and in certain cases correcting, the completeness and accuracy of the underlying data used for warranty costs estimates and other significant accounting estimates and transactions. The substantive procedures have allowed us to conclude that, notwithstanding the material weaknesses in our internal controls over financial reporting described below, the condensed consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with U.S. GAAP.
The two material weaknesses in our internal control over financial reporting, which are described more fully in our Annual Report on Form 10-K for the fiscal year ended October 31, 2013, that existed as of October 31, 2013 and continued to exist as of January 31, 2014, are as follows:
1)
We did not have sufficient controls designed to validate the completeness and accuracy of underlying data used in the determination of significant estimates and accounting transactions. Specifically, controls were not designed to identify errors in the underlying data which was used to calculate warranty cost estimates and other significant accounting estimates and the accounting effects of significant transactions.
2)
We did not maintain effective controls over the presentation of income tax expense between different categories of income. Specifically, we did not apply the exception within the intra-period tax allocation rules under applicable accounting guidance which requires, in certain circumstances, an allocation of tax expense to Other Comprehensive Income and an offsetting tax benefit to Continuing Operations, with no net impact to the total tax benefit included in total comprehensive loss.
Management’s Remediation Initiatives
We are making progress toward achieving the effectiveness of our disclosure controls and procedures. Remediation generally requires making changes to how controls are designed and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. We have assigned owners, who are responsible for implementing and monitoring our short-term and long-term remediation plans, as well as executive owners to oversee the necessary remedial changes to the overall design of our internal control environment and to address the root causes of our material weaknesses.
Our initiatives, summarized below, are intended to remediate our material weaknesses and to continue to enhance our internal control over financial reporting.
1)
We are designing, documenting, and testing controls that are intended to validate the completeness and accuracy of the data used for warranty costs estimates and other significant accounting estimates and transactions.
2)
We already have a control in place in which outside tax advisors review the tax provision each quarter. To further strengthen controls, we are enhancing the quarterly discussions with our outside tax advisors to review business developments that could affect the determination or presentation of income tax expense.
(b) Changes in Internal Control over Financial Reporting
We are taking actions to remediate the material weakness related to our internal controls over financial reporting, as described above. However, our remediation efforts were not complete as of January 31, 2014. Other than the changes disclosed above, there were no material changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act that occurred during the quarter ended January 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
Item 3.     Legal Proceedings
During the three months ended January 31, 2014, there have been no material developments from the legal proceedings disclosed in our Annual Report on Form 10-K for our fiscal year ended October 31, 2013, except for those disclosed below:
Shareholder Litigation
In the "10b-5 Cases” (as defined under Note 12, Commitments and Contingencies, to the accompanying consolidated financial statements, above), the defendants filed Motions to Dismiss on December 17, 2013. The plaintiff filed an Omnibus Opposition to Defendants’ Motions to Dismiss, and a Motion to Strike on January 31, 2014. The defendants filed an opposition to the Motion to Strike on February 18, 2014 and filed a reply in support of their Motions to Dismiss and on March 3, 2014.
Item 1A.
Risk Factors
During the three months ended January 31, 2014, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for our year ended October 31, 2013.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities
None.
Item 3.
Defaults upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
None.

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Item 6. Exhibits
Exhibit:
 
Description
 
Page
 
 
 
 
 
(10)
 
 
E-1
(31.1)
 
 
E-2
(31.2)
 
 
E-3
(32.1)
 
 
E-4
(32.2)
 
 
E-5
(99.1)
 
 
E-6
(101.INS)
 
XBRL Instance Document
 
N/A
(101.SCH)
 
XBRL Taxonomy Extension Schema Document
 
N/A
(101.CAL)
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
N/A
(101.LAB)
 
XBRL Taxonomy Extension Label Linkbase Document
 
N/A
(101.PRE)
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
N/A
(101.DEF)
 
XBRL Taxonomy Extension Definition Linkbase Document
 
N/A
All exhibits other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information called for is shown in the consolidated financial statements and notes thereto in the Quarterly Report on Form 10-Q for the period ended January 31, 2014.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
NAVISTAR INTERNATIONAL CORPORATION
 
(Registrant)
 
/s/    RICHARD C. TARAPCHAK        
 
Richard C. Tarapchak
 
Senior Vice President and Corporate Controller
 
(Principal Accounting Officer)
March 5, 2014


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