Company Quick10K Filing
Quick10K
Navistar
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$32.84 99 $3,250
10-K 2018-10-31 Annual: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
10-Q 2018-01-31 Quarter: 2018-01-31
10-K 2017-10-31 Annual: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-Q 2017-04-30 Quarter: 2017-04-30
10-Q 2017-01-31 Quarter: 2017-01-31
10-K 2016-10-31 Annual: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-04-30 Quarter: 2016-04-30
10-Q 2016-01-31 Quarter: 2016-01-31
8-K 2019-02-14 Shareholder Vote
8-K 2019-01-14 Regulation FD
8-K 2018-12-31 M&A, Exhibits
8-K 2018-12-18 Regulation FD, Exhibits
8-K 2018-12-18 Earnings, Regulation FD, Exhibits
8-K 2018-12-06 Regulation FD, Exhibits
8-K 2018-11-30 Enter Agreement, Exhibits
8-K 2018-10-10 Officers, Exhibits
8-K 2018-09-26 Enter Agreement, Exhibits
8-K 2018-09-06 Regulation FD, Exhibits
8-K 2018-09-06 Earnings, Regulation FD, Exhibits
8-K 2018-08-27 Regulation FD, Exhibits
8-K 2018-08-14 Officers, Exhibits
8-K 2018-07-31 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-07-12 Regulation FD, Exhibits
8-K 2018-06-14 Enter Agreement, Exhibits
8-K 2018-06-05 Earnings, Regulation FD, Exhibits
8-K 2018-05-25 Regulation FD, Exhibits
8-K 2018-05-11 Officers
8-K 2018-04-18 Officers, Exhibits
8-K 2018-03-01 Regulation FD, Exhibits
8-K 2018-02-13 Shareholder Vote
HMC Honda Motor
F Ford
RACE Ferrari
PCAR Paccar
WBC Wabco Holdings
OSK Oshkosh
FSS Federal Signal
SPAR Spartan Motors
KNDI Kandi Technologies Group
SOLO Electrameccanica Vehicles
NAV 2018-10-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Summary
EX-3 navex310312018.htm
EX-4 navex410312018.htm
EX-10 navex1010312018.htm
EX-21 navex2110312018.htm
EX-23.1 navex23110312018.htm
EX-24 navex2410312018.htm
EX-31.1 navex31110312018.htm
EX-31.2 navex31210312018.htm
EX-32.1 navex32110312018.htm
EX-32.2 navex32210312018.htm
EX-99.1 navex99110312018.htm

Navistar Earnings 2018-10-31

NAV 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 nav10k2018.htm 10-K Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-K
___________________________________________________
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2018

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
___________________________________________________
navistarlogo2015a19.jpg
NAVISTAR INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
_______________________________________________
Delaware
36-3359573
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
2701 Navistar Drive, Lisle, Illinois
60532
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (331) 332-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class 
 
Name of each exchange on which registered
Common stock (par value $0.10)
 
New York Stock Exchange
Cumulative convertible junior preference stock, Series D (par value $1.00)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No   þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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
 
  
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  þ
As of April 30, 2018, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $1,272 million.
As of November 30, 2018, the number of shares outstanding of the registrant’s common stock was 98,900,635, net of treasury shares.
Documents incorporated by reference: Portions of the Company's proxy statement for the 2019 annual meeting of stockholders scheduled to be held on February 12, 2019 are incorporated by reference in Part III.
 
 
 
 
 



NAVISTAR INTERNATIONAL CORPORATION FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
PART I
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
 
PART III
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
 
 
 
PART IV
Item 15.
 
Item 16.
 
 
 
 
 
 
 
EXHIBIT INDEX:
 
Exhibit 3
 
 
 
Exhibit 4
 
 
 
Exhibit 10
 
 
 
Exhibit 12
 
 
 
Exhibit 21
 
 
 
Exhibit 23.1
 
 
 
Exhibit 24
 
 
 
Exhibit 31.1
 
 
 
Exhibit 31.2
 
 
 
Exhibit 32.1
 
 
 
Exhibit 32.2
 
 
 
Exhibit 99.1
 
 

2





Disclosure Regarding Forward-Looking Statements
Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of the federal securities laws. 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 expectations and estimates relating to the impact of the federal Tax Cuts and Jobs Act (the “Tax Act”) on our business and financial condition;
the implementation of, and expected benefits from, our strategic alliance with TRATON AG (formerly Volkswagen Truck & Bus AG) and certain of its subsidiaries and affiliates ("TRATON Group");
our development and launch of new products and technologies;
anticipated sales, volume, demand, markets for our products, and financial performance;
anticipated performance and benefits of our products and technologies;
our business strategies relating to, and our ability to meet, federal and state regulatory heavy-duty diesel emissions standards applicable to certain of our engines, including the timing and costs of compliance and consequences of noncompliance with such standards, as well as our ability to meet other federal, state and foreign regulatory requirements;
our business strategies and short-term and long-term goals, and activities to accomplish such strategies and goals;
our ability to implement our strategy focused on growing the core business (i.e., the truck and parts markets for the United States and Canada, where we participate primarily in the Class 6 through 8 vehicle market segments (the “Core” business and “Core” markets)), driving operational excellence, pursuing innovative technology solutions, leveraging the TRATON Group strategic alliance, continuing our commitment to a customer-centric approach, enhancing cross functional teamwork and our winning culture, and improving our financial performance, as well as the results we expect to achieve from the implementation of our strategy;
our expectations related to new product launches;
anticipated results from the realignment of our leadership and management structure;
anticipated results from acquisitions, dispositions, strategic alliances, and joint ventures we complete;
our expectations and estimates relating to restructuring activities, including restructuring charges and timing of cash payments related thereto, and operational flexibility, savings, and efficiencies from such restructurings;
our expectations relating to debt refinancing activities;
our expectations relating to the potential effects of anticipated divestitures and closures of businesses;
our expectations relating to our cost-reduction actions and actions to reduce discretionary spending;
our expectations relating to our ability to service our long-term debt;
our expectations relating to our wholesale and retail finance receivables and revenues;
liabilities resulting from environmental, health and safety laws and regulations;
our anticipated capital expenditures;
our expectations relating to payments of taxes;
our expectations relating to warranty costs;
our expectations relating to interest expense;
our expectations relating to impairment of goodwill and other assets;
costs relating to litigation and similar matters;
estimates relating to pension plan contributions and unfunded pension and postretirement benefits;
our expectations relating to commodity price risk, including the impact of tariff increases or potential new tariffs; and
anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations.


3





These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our results of operations and could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to differences in our future financial results include those discussed in Item 1A, Risk Factors, set forth in Part I, as well as those factors discussed elsewhere in this report. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.

4





Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as a result, are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the United States ("U.S.") Securities and Exchange Commission ("SEC"). We make these filings available free of charge on our website (http://www.navistar.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Annual Report on Form 10-K. 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.

5





PART I
Item 1.
Business
Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating entities are Navistar, Inc. ("NI") and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer to NIC and its consolidated subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We report our annual results for our fiscal year, which ends October 31. As such, all references to 2018, 2017, and 2016 contained within this Annual Report on Form 10-K relate to the applicable fiscal year unless otherwise indicated.
Overview
We are an international manufacturer of International® brand commercial and military trucks, proprietary diesel engines, and IC Bus® ("IC") brand school and commercial buses, as well as a provider of service parts for trucks and diesel engines. We also provide retail, wholesale, and lease financing services for our trucks and parts.
Our Products and Services
Our principal products and services include:
Trucks—We manufacture and distribute Class 4 through 8 trucks and buses in the common carrier, private carrier, government, leasing, construction, energy/petroleum, military vehicle, and student and commercial transportation markets under the International® and IC brands. We design and manufacture proprietary diesel engines for our International branded trucks and military vehicles and IC branded buses.
Parts—We support our International® brand commercial and military trucks, IC brand buses, and our proprietary engines, as well as our other product lines, by distributing proprietary products together with a wide selection of other standard truck, trailer, and engine service parts.
Financial Services—We provide and manage retail, wholesale, and lease financing of products sold by the Truck and Parts segments, as well as their dealers, within the U.S., Canada and Mexico.
Our Strategy
Our Business
Our Core business is the truck and parts markets for the United States and Canada, where we participate primarily in the Class 6 through 8 vehicle market segments. With more than a million trucks on the road in the United States and Canada, nearly one in four Class 6 through 8 vehicles is an International® truck. Nearly half of all school buses on the road today are our IC brand. We have one of the largest commercial vehicle parts distribution networks in the United States and a captive finance company. Outside of our Core markets, International® is one of the leading truck brands in Mexico and much of Latin America. We are the largest independent diesel engine company in Brazil, with our wholly-owned subsidiary International-Industria Automotiva da America do Sul Ltda. (“IIAA”), formerly MWM International-Industria de Motores da America Do Sul Ltda. We also export trucks, buses, and engines to niche markets around the world.
We continue to take actions that we believe will improve our performance and evaluate additional opportunities to enhance value for our customers. The following is a summary of our 2018 accomplishments and our expectations going forward.
Our 2018 Accomplishments
We continue to show positive progress on our top priorities as we move from a turn-around phase to a growth phase. In 2018, we ended with a significant volume increase and we were the only brand to increase Class 8 market share.
I.
Sales: In 2018, we increased our Class 8 market share in a strong industry environment by nearly 2%, and our Core chargeout volumes ended at 73,900. Overall Class 6-8 retail market share was higher than the prior year. Our all-makes Fleetrite® brand experienced double-digit growth year over year for our overall Parts segment (U.S., Canada, Mexico and export).
Product Launches: We focused on our Core markets and invested in product development to increase customer value, improve our customers’ business and enhance customer experience.
Truck: In January 2018, we announced the International® HV™ Series Mid-Range Diesel which includes a bridge formula truck for the concrete industry. In March 2018, we announced the International® MV™ Series Mid-Range Diesel model, our new medium-duty truck.

6





Bus: In February 2018, we announced the newly updated IC Bus® RE Series Type D school bus featuring remote diagnostics connectivity solutions. In July 2018, IC Bus® became the first school bus original equipment manufacturer (OEM) to make electronic stability control and collision mitigation standard on all IC Bus models with air brakes.
II.
Strategic Alliance: Our strategic alliance with TRATON Group continues to progress. Within the strategic alliance, the parties formed a joint venture to make recommendations for sourcing, evaluating and negotiating joint procurement opportunities.
The procurement joint venture has continued to give us access to global scale to achieve significant cost reductions. To date, our procurement joint venture has delivered over 90% of the target the parent companies had set for the first 24 months. It has identified a pipeline of additional projects to deliver the cumulative savings projected over the first five years.
The rest of the strategic alliance is on plan to deliver technology and other synergies:
1.
Pursuing medium-duty vehicle electric powertrain.
2.
Collaborating on fully integrated, next generation diesel big bore powertrains.
3.
Collaborating on connected vehicle hardware and service solutions.
III.
Quality and Uptime: Our focus on improving quality and uptime can best be seen in the reduction of dealer dwell time through improvements in diagnostic and repair procedures.
Warranty expense as a percentage of manufacturing revenue has decreased to 1.7%, from 2.4% in the prior year.
Our new product command center (“Command Center”) focuses on dwell time improvement for our new products. In 2018, the percent of repairs completed in 24 hours on our new 13L A26 engine improved by 10 percentage points.
IV.
OnCommand Connection (“OCC”): OCC is our unique open architecture, all-brands remote diagnostics system focusing on improving vehicle uptime for our customers.
OCC supports the Command Center using proactive diagnostics and predictive tools.
We have over 600,000 vehicles actively reporting in OCC of which over 75% report via telematics.
We continue to add telematics partners to our portfolio.
In 2018, we launched OCC Telematics which includes access to the OCC Portal as a standard feature on our RH™, LT™ and Lonestar products.
V.
Cost Management: Focus on lowering material costs in our procurement and engineering organizations has resulted in improved margins.
Our Expectations Going Forward
Going forward, we believe we are well-positioned and have the right strategic vision in place to build upon our 2018 accomplishments. We intend to be the number one choice and the most customer focused, innovative and value-creating truck and bus solution provider in the Americas. To do that, we will prioritize and focus on closing the gaps before setting the new standard. The strategic vision includes areas of focus centered around:
Customer-Centric
Operational Excellence
Core Business
Business Transformation
Strategic Alliance with TRATON Group and
Cross-Functional Teamwork and a Winning Culture
By focusing on customer and market segmentation, we believe we will be able to better align our efforts with customer-specific applications and product requirements. We plan to continue to drive improvement of key performance metrics and we are committed to enhance customer value. We are operating with great care to execute flawless launches. We will further investigate electrification and build our eCommerce business to support our ease of doing business initiative. Together with our strategic alliance partner, TRATON Group, we expect to have a fully integrated proprietary powertrain as early as 2020, expect to launch the next generation connectivity module allowing feature sharing, and expect to launch an electric medium-duty truck and electric school bus. We intend to further develop our team-based organization, enhance collaborative work environments, and utilize visual management tools. We expect our financial performance to continue to improve due to savings from expected cost reduction actions and revenue growth.

7





Our Operating Segments
We operate in four industry segments: Truck, Parts, Global Operations (collectively referred to as "Manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively referred to as "Financial Services operations"). Corporate contains those items that do not fit into our four segments. Selected financial data for each segment can be found in Note 14, Segment Reporting, to the accompanying consolidated financial statements.
Truck Segment
Our Truck segment manufactures and distributes Class 4 through 8 trucks, buses, and military vehicles under the International and IC brands, along with production of proprietary engines, primarily in the North America markets that include the U.S., Canada, and Mexico. Our Truck segment also includes our truck export business under the International and IC brands as well as products that support the military truck product lines. The proprietary engines produced in North America are primarily used in our trucks and buses. Our strategy is to deliver the highest quality commercial trucks, buses, and military vehicles. We continue to expand our markets, which includes the exportation of our truck and bus products. The Truck segment is our largest operating segment based on total external sales and revenues.
We compete primarily in our Core markets. The Truck segment's manufacturing operations in the U.S. and Mexico consist principally of assembling components manufactured by our suppliers, as well as designing, engineering, and producing certain sheet metal components, including truck cabs, and proprietary engines.
The Truck segment's manufacturing operations also include the production of diesel engines, which are primarily used in our trucks. The operations at our engine manufacturing facility consist principally of the assembly of components manufactured by our suppliers, as well as machining operations relating to steel and grey-iron components. We market a portion of our commercial products directly to large fleets and the remainder through our extensive independent dealer network in North America, which offers a comprehensive range of services and other support functions to our end users. Our commercial trucks are distributed in virtually all key markets through our distribution and service network retail outlets, which is comprised of 727 outlets in the U.S. and Canada and 89 outlets in Mexico, as of October 31, 2018, and our export truck operations, primarily in Latin America. In addition, our network of used truck centers and International certified used truck dealers in the U.S. and Canada provides trade-in support to our dealers and national accounts group, and markets all makes and models of reconditioned used trucks to owner-operators and fleet buyers.
The Truck business competes on many dimensions, including customer service, price, ease-of-doing-business, uptime, and parts availability. The markets in which the Truck segment competes are subject to considerable volatility and fluctuation in response to cycles in the overall business environment. These markets are particularly sensitive to the industrial sector, which generates a significant portion of the freight tonnage hauled. Government regulation has also impacted, and will continue to impact, trucking operations as well as the efficiency and specifications of trucking equipment.
The Class 4 through 8 truck and bus markets in North America are highly competitive. Major U.S.-controlled domestic competitors include PACCAR Inc. ("PACCAR"), which sells vehicles under the Kenworth and Peterbilt nameplates in North America, and Ford Motor Company ("Ford"). Competing foreign-controlled domestic manufacturers include Freightliner and Western Star (both subsidiaries of Daimler-Benz AG ("Mercedes Benz")), Volvo and Mack (both subsidiaries of Volvo Global Trucks), and Hino (a subsidiary of Toyota Motor Corporation ("Toyota")). Major U.S. military vehicle competitors include BAE Systems, General Dynamics Land Systems, and Oshkosh Corporation. In addition, smaller, foreign-controlled market participants such as Isuzu Motors America, Inc. ("Isuzu"), UD Trucks North America (a subsidiary of AB Volvo ("UD Trucks")), and Mitsubishi Motors North America, Inc. ("Mitsubishi") are competing in the U.S. and Canadian truck markets with primarily imported products. In Mexico, the major domestic competitors are Kenmex (a subsidiary of PACCAR) and Freightliner. In our primary truck export market of Latin America, we compete with many truck manufacturers, including PACCAR, Freightliner, and Mack.
Parts Segment
Our Parts segment provides customers with proprietary products needed to support the International commercial truck, IC Bus, proprietary engine lines, and export parts business, as well as our other product lines by providing customers with proprietary products together with a wide selection of other standard truck, trailer, and engine service parts. We distribute service parts through the dealer network that supports our trucks and engines. The Parts segment is our second largest operating segment based on total external sales and revenues.

8





Our extensive dealer channel provides us with an advantage in serving our customers by having our parts available when and where our customers require service. Goods are delivered to our customers either through one of our eleven parts distribution centers operated out of North America, or through direct shipment from our suppliers. We have a dedicated parts sales team within North America, as well as national account teams focused on large fleet customers. We also serve our global markets through our dedicated export business which supports customers globally in Latin America, the Middle East, northern Africa, South Africa, Europe, Australia, Asia and Russia. In conjunction with the Truck sales and technical service group, we provide an integrated support team that works to find solutions to support our customers.
The Parts business competes on many dimensions including customer service, price, ease-of-doing-business, and parts availability. We sell a substantial amount of all-make parts for light-, medium- and heavy-duty trucks ("All-Make parts"), which are common across OEM truck manufacturers. We sell remanufactured parts through our ReNEWed product line and private label products through our Fleetrite brand name. The dealers and fleets have multiple outlets to purchase All-Make parts including other OEMs (including but not limited to Freightliner, PACCAR, Mack and Volvo), independent distributors, and traditional retail outlets, including Fleetpride, TruckPro, and National Auto Parts Association ("Napa"). In addition, our Uptime Parts business sells directly to customers. We sell a wide-range of proprietary parts, and we are subject to varying degrees of competition for many of our proprietary parts from alternative parts-providers and independent remanufacturers.
Also included in the Parts segment is our Blue Diamond Parts, LLC ("BDP") joint venture with Ford, which manages the sourcing, merchandising and distribution of certain service parts for North America Ford vehicles. Major competitors for our BDP joint venture include Alliant Power, Jasper Engine Transmissions, and Delphi Automotive.

Global Operations Segment
Our Global Operations segment includes businesses that derive revenue from outside our Truck and Parts segments and primarily consists of the operations of our wholly-owned subsidiary, IIAA. IIAA is a leader in the South American mid-range diesel engine market, manufacturing and distributing mid-range diesel engines and providing customers with additional engine offerings in the agriculture, marine, genset, and light truck markets. Additionally, we also sell our engines to global OEMs for various on-and-off-road applications. We offer contract manufacturing services under IIAA's MWM brand to OEMs for the assembly of their engines, particularly in South America. IIAA has a very significant dealer network and Parts Distribution Center, responsible for internal and export sales of spare parts. As part of the Global Operations segment, IIAA has engine manufacturing operations in Brazil and Argentina. The Global Operations segment is our third largest operating segment based on total external sales and revenues.
Our commercial products are marketed through our independent dealer network, which offers a comprehensive range of services and other support functions to our end users.
IIAA also has a commercial agreement with an Indian company, Mahindra Heavy Engines Ltd. ("Mahindra"), under which MWM engines (4.8L and 7.2L) are manufactured at a plant located in the Chakan Industrial Area - city of Pune/India. The engines produced at that plant are exclusively sold by MWM outside of the Indian market, providing a cost competitive export platform in support of the Asian markets.
In Brazil, IIAA's engines compete with Cummins, Mercedes Benz, and Fiat Powertrain ("FPT") in the light and medium truck markets; Mercedes Benz, Cummins, Scania, MAN, Volvo, and FPT in the heavy truck market; Mercedes Benz in the bus market; New Holland (a subsidiary of CNH Industrial N.V.), Sisu Diesel (a subsidiary of AGCO Corporation), and Deere & Company in the agricultural market; and Scania and Cummins in the stationary market.
Financial Services Segment
Our Financial Services segment provides and manages retail, wholesale, and lease financing of products sold by the Truck and Parts segments and their dealers. We also finance wholesale and retail accounts receivable. Substantially all revenues earned by the Financial Services segment are derived from supporting the sales of our vehicles and products. The Financial Services segment continues to meet the primary goal of providing and managing financing to our customers in U.S., Canada and Mexico markets by providing or arranging cost-effective funding sources, while working to mitigate credit losses and impaired vehicle asset values. NFC provides wholesale financing for 100% of new truck inventory sold to our dealers and distributors in the U.S. through the customary free interest period offered by NI. At October 31, 2018 and 2017, NFC retained floor plan financing for approximately 74% and 77% of the dealers, respectively, after the expiration of any free interest period. The Financial Services segment also facilitates financing relationships in other countries to support our Manufacturing Operations.
The Financial Services segment manages the relationship with Navistar Capital (a program of BMO Harris Bank N.A. and Bank of Montreal (together, "BMO")). Navistar Capital is our third-party preferred source of retail and lease customer financing for equipment offered by us and our dealers in the U.S. In addition, Navistar Capital Canada (also a BMO program) provides financing to support the sale of our products in Canada.

9





Government Contracts
As a U.S. government contractor, we are subject to specific regulations and requirements as mandated by our contracts. These regulations include Federal Acquisition Regulations, Defense Federal Acquisition Regulations, and the Code of Federal Regulations. We are also subject to routine audits and investigations by U.S. government agencies such as the Defense Contract Management Agency and Defense Contract Audit Agency. These agencies review and assess compliance with contractual requirements, cost structure, cost accounting, and applicable laws, regulations, and standards.
A portion of our existing U.S. government contracts extend over multiple years and are conditioned upon the continuing availability of congressional appropriations. In addition, our U.S. government contracts generally permit the contracting government agency to terminate the contract, in whole or in part, either for the convenience of the government or for default based on our failure to perform under the contract.
Engineering and Product Development
Our engineering and product development programs are focused on new product introductions, enhancements of current products, quality improvements and continuous material cost-reductions across our truck and bus product lines.  We have shifted our investment focus from engine to truck by developing driver-centric designs with world class uptime and fuel economy that incorporates industry leading connected technologies utilizing Navistar’s OnCommand open architecture telematics solution. In 2018, we completed the launch of the International® HV™ Series for the Severe Service segment and the International® MV™ Series for the Medium Duty segment.  These product introductions are the continuation of the vehicle line overhaul which is the most significant product investment the Company has made in the last ten years. Additionally, we reintroduced the IC Bus’s RE type D school bus along with an 8.0L gasoline engine in the CE Bus™. Along with Propane CE Bus, we now have the most comprehensive powertrain offerings in the industry today. During the first six months of 2019, we expect to complete the launch of the Horizon suite of vehicles for the Global markets. We also expect to launch a brand-new Class 4/5 vehicle in conjunction with General Motors by the end of the calendar year.  Navistar is investing in ADAS, connected technologies and electric vehicles, working with strategic suppliers and partners. We introduced our first electric school bus at the recent National Association for Pupil Transportation Annual Conference. We believe that the alliance with TRATON Group will further expand our capabilities in these areas.
We participate in very competitive markets with more stringent regulatory requirements and faster technology adoptions, and we continue to believe that our strong commitment to engineering and product development is required to drive long-term growth. Our engineering and product development costs were $297 million in 2018, compared to $251 million in 2017 and $247 million in 2016. We expect that greenhouse gas (“GHG”) phase 2 regulations announced in 2016 will drive significant investments in product development by us and our competitors.
Backlog
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.
The following table provides our worldwide backlog of unfilled truck orders as of October 31, 2018 and 2017:
 
Units
 
Value
As of October 31:
 
 
(in billions)
2018
51,000

 
$
3.9

2017
16,000

 
1.4

Production of our October 31, 2018 backlog is expected to be substantially completed during 2019. The backlog of unfilled orders is one of many indicators of market demand; 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.
Employees
As our business requirements change, fluctuations may occur within our workforce from year to year. We carefully managed our attrition, approving the replacement of key positions that we believe are critical to sustaining the improved business performance in 2018. For more information, see Note 2, Restructurings and Impairments, to the accompanying consolidated financial statements.
In 2018, we sold our Cherokee, Alabama facility. In addition, production at the Melrose Park, Illinois facility ceased on May 17, 2018. In 2017, we sold our Conway, Arkansas location, a components business focused on supplying parts to our Tulsa, Oklahoma bus plant. In 2016, we sold Pure Power Technologies, LLC, a components business focused on air and fuel systems, and our engine and foundry facilities in Indianapolis, Indiana. For more information, see Note 2, Restructurings and Impairments, to the accompanying consolidated financial statements.

10





The following tables summarize the number of employees worldwide as of the dates indicated and an additional subset of active union employees represented by the United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW"), and other unions, for the periods as indicated:
 
As of October 31,  
 
2018
 
2017
 
2016
Employees worldwide:
 
 
 
 
 
Total active employees
13,100

 
11,400

 
11,300

Total inactive employees(A)
900

 
900

 
1,100

Total employees worldwide
14,000

 
12,300

 
12,400

Total active union employees:
 
 
 
 
 
Total UAW
3,300

 
2,900

 
3,100

Total other unions
5,100

 
3,800

 
2,300

__________________ 
(A)
Employees are considered inactive in certain situations including disability leave, leave of absence, layoffs, and work stoppages. Included within inactive employees are approximately 300 employees as of October 31, 2016, represented by the National Automobile, Aerospace and Agricultural Implement Workers of Canada ("CAW") at our Chatham, Ontario heavy truck plant, which was closed in 2011 due to an inability to reach a collective bargaining agreement with the CAW. For more information, see Note 2, Restructurings and Impairments, to the accompanying consolidated financial statements.
See Item 1A, Risk Factors, for further discussion related to the risk associated with labor and work stoppages.
Patents and Trademarks
We seek and obtain patents on our inventions and own a significant patent portfolio. Additionally, many of the components we purchase for our products are protected by patents that are owned or controlled by the component manufacturer. We license third-party patents for the manufacture of our products and also grant licenses of our patents. The monetary royalties paid or received under these licenses are not material.
Our primary trademarks are an important part of our worldwide sales and marketing efforts and provide clear identification of our products and services in the marketplace. To support these efforts, we maintain, or have pending, registrations of our primary trademarks in those countries in which we do business or expect to do business. We grant licenses under our trademarks for consumer-oriented goods, such as toy trucks and apparel, outside the product lines that we manufacture. The monetary royalties received under these licenses are not material.
Supply
We purchase raw materials, parts, and manufactured components from numerous third-party suppliers. To avoid duplicate tooling expenses and to maximize volume benefits, single-source suppliers fill a majority of our requirements for parts and manufactured components. Some parts and manufactured components are generic to the industry while others are of a proprietary design requiring unique tooling, which require additional effort to relocate. However, we believe our exposure to a disruption in production as a result of an interruption of raw materials and supplies is no greater than the industry as a whole.
Our costs for trucks and parts sold consist primarily of material costs which are influenced by commodities prices such as steel, precious metals, resins, and petroleum products. We continue to look for opportunities to mitigate the effects of market-based commodity cost increases through a combination of design changes, material substitution, alternate supplier resourcing, global sourcing efforts, and hedging activities. The objective of this strategy is to ensure cost stability and competitiveness in an often volatile global marketplace. Generally, the impact of commodity cost fluctuations in the global market will be reflected in our financial results on a delayed basis, depending on many factors including the terms of supplier contracts, special pricing arrangements, and any commodity hedging strategies employed.
Impact of Government Regulation
Truck and engine manufacturers continue to face significant governmental regulation of their products, especially in the areas of environmental and safety matters, including on-highway emissions standards which require reducing allowable particulate matter and oxides of nitrogen ("NOx"). Meeting these emissions standards resulted in a significant increase in the cost of our products.

11





In 2010, the initial phase-in of onboard diagnostic ("OBD") requirements commenced for the initial family of truck engines and those products were certified. The phase-in for the remaining engine families occurred in 2013. Canadian heavy-duty engine emissions regulations essentially mirror those of the U.S. Environmental Protection Agency (the "EPA"). In Mexico, we offer EPA 2004 and Euro IV engines that comply with current standards in that country. Mexico is lowering NOx emission standards in 2019 and 2021 to Euro V and VI levels, respectively. Navistar Heavy Duty Diesel ("HDD") engines meet the EURO V and VI with current controls technology.
Truck manufacturers are also subject to various noise standards imposed by federal, state, and local regulations. As the engine is one of a truck's primary sources of noise, we invest a great deal of effort to develop strategies to reduce engine noise. We are also subject to the National Traffic and Motor Vehicle Safety Act ("Safety Act") and Federal Motor Vehicle Safety Standards ("Safety Standards") promulgated by the National Highway Traffic Safety Administration ("NHTSA").
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 the NHTSA issued final rules for GHG emissions and fuel economy in 2011, which were fully implemented in model year 2017. We are complying with these rules through use of existing technologies and implementation of emerging technologies as they become available. The EPA and NHTSA adopted a final rule in October 2016 with a second phase of federal GHG emission and fuel economy regulations. This rule contains significantly more stringent emissions levels for engines and vehicles, which will require substantial investments of capital. The GHG emission standards in the rule will take effect in model year 2021 and be implemented in three stages culminating in model year 2027. We continue to assess the impact of the rule on us and our stakeholders as we develop our product planning for that period.
Canada adopted its version of fuel economy and GHG emission regulations in February 2013. These regulations are substantially aligned with U.S. fuel economy and GHG emission regulations. Canada has finalized heavy duty phase 2 GHG rulemaking, which is substantially similar to EPA regulations with more stringent requirements for heavy haul tractors.
In December 2014, California adopted GHG emission rules for heavy duty vehicles equivalent to EPA phase 1 rules and is in the process of adopting its phase 2 equivalent rules. In 2014 California also adopted an optional lower emission standard for oxides of nitrogen ("NOx") in California. California has stated its intention to lower NOx standards for California-certified engines and has requested that the EPA lower its standards. In June 2016, several regional air quality management districts in California and other states, as well as the environmental agencies for several states, petitioned the EPA to adopt lower NOx emission standards for on-road heavy duty trucks and engines. In addition to lower NOx, EPA and the California Air Resources Board ("CARB") may consider other actions, including extending emission warranty periods. On November 14, 2018 the EPA announced the “Cleaner Trucks Initiative” which will begin the regulatory process for a reduced NOx emissions regulation while also streamlining compliance and certification requirements. In addition to lower NOx, EPA and California may consider other actions, including extending warranty periods, mandating sales of zero emission trucks, and requiring certification of zero emission heavy duty vehicles. We will monitor and participate in this rulemaking. We expect that heavy duty vehicle and engine fuel economy and GHG emissions rules will be under consideration in other global jurisdictions in the future. These standards will require significant investments of capital, will significantly increase costs of development for engines and vehicles, and will require us to incur administrative costs arising from implementation of the standards.
The EPA also issued a final rule in October 2015 that lowered the National Ambient Air Quality Standard for ozone to 70 parts per billion. This rule could lead to future lower emission standards for substances that contribute to ozone, including NOx from vehicles, at the federal and state levels.
Our facilities may be subject to regulation related to climate change, and climate change itself may also have some impact on our operations. However, these impacts are currently uncertain and we cannot predict the nature and scope of those impacts.

12





Executive Officers of the Registrant
The following selected information for each of our current executive officers (as defined by regulations of the SEC) was prepared as of November 30, 2018.
Name
 
Age
 
Position with the Company
 
 
 
 
 
Troy A. Clarke
 
63
 
Chairman, President and Chief Executive Officer
Walter G. Borst
 
56
 
Executive Vice President and Chief Financial Officer
Persio V. Lisboa
 
53
 
Executive Vice President and Chief Operating Officer
William V. McMenamin
 
59
 
President, Financial Services and Treasurer
Samara A. Strycker
 
46
 
Senior Vice President and Corporate Controller
Curt A. Kramer
 
50
 
Senior Vice President and General Counsel
Richard E. Bond
 
65
 
Associate General Counsel and Corporate Secretary
Troy A. Clarke has served as our President and Chief Executive Officer and as a member of our Board of Directors since April 2013 and has served as Chairman of our Board of Directors since February 2017. Mr. Clarke served as our President and Chief Operating Officer from August 2012 to April 2013. Prior to holding these positions, Mr. Clarke served at NI as President of the Truck and Engine Group from June 2012 to August 2012, as President of Asia-Pacific Operations of NI from 2011 to 2012, and as Senior Vice President of Strategic Initiatives of NI from 2010 to 2011. Prior to joining NI, Mr. Clarke held various positions at General Motors Company (“GM”), including President of GM North America from 2006 to 2009 and President of GM Asia Pacific from 2003 to 2006. On June 1, 2009, GM filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Walter G. Borst has served as our Executive Vice President and Chief Financial Officer since June 2013. Prior to joining NI, Mr. Borst served as Chairman, President and CEO of GM Asset Management and Vice President of GM since 2010. Prior to that, Mr. Borst served as Vice President and Treasurer of GM from 2009 to 2010 and as Treasurer of GM from 2003 to 2009. On June 1, 2009, GM filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Persio V. Lisboa has served as Executive Vice President and Chief Operating Officer of NIC since March 2017. Prior to holding this position, Mr. Lisboa served as the President, Operations of NI from November 2014 to March 2017, as Senior Vice President, Chief Procurement Officer of NI from December 2012 to November 2014, as Vice President, Purchasing and Logistics and Chief Procurement Officer of NI from October 2011 to November 2012 and Vice President, Purchasing and Logistics of NI from August 2008 to October 2011. Prior to these positions, Mr. Lisboa held various management positions within the Company’s North American and South American operations.
William V. McMenamin has served as our President, Financial Services and Treasurer since August 2015. He has also served as President of NFC since January 2013. Mr. McMenamin served as Vice President, Chief Financial Officer and Treasurer of NFC from October 2008 to January 2013. Prior to these positions, he served as Vice President of Strategy of NFC from May 2007 to October 2008, Vice President of Credit of NFC from April 2005 to May 2007, and Director of Corporate Finance of NI from 2001 to 2005. Prior to joining Navistar, Mr. McMenamin held various positions in finance and accounting with a human resources services company, a national bank and a national accounting firm.
Samara A. Strycker has served as Senior Vice President and Corporate Controller of NIC since August 2014. Prior to joining NIC, Ms. Strycker served as Regional Controller, Americas, of General Electric Healthcare ("GE Healthcare") from July 2010 to July 2014 and prior to that position she served as Assistant Controller of GE Healthcare from September 2008 to July 2010.  Prior to joining GE Healthcare, Ms. Strycker was employed at PricewaterhouseCoopers LLP from 1993 to 2008. Ms. Strycker is a Certified Public Accountant.
Curt A. Kramer has served as our Senior Vice President and General Counsel since April 2017. Prior to holding this position, Mr. Kramer served as Associate General Counsel and Corporate Secretary of NI since December 2007. Prior to holding these positions, Mr. Kramer served as General Attorney of NI from April 2007 to December 2007, Senior Counsel of NI from 2004 to 2007, Senior Attorney of NI from 2003 to 2004, and Attorney of NI from 2002 to 2003. Prior to joining NI, Mr. Kramer was in private practice.

13





Richard E. Bond has served as our Associate General Counsel and Corporate Secretary since June 2017. Mr. Bond joined NI in 2009 as Assistant General Attorney and became General Attorney and Assistant Corporate Secretary in June 2015. Prior to joining NI, he served Monaco Coach Corporation as Senior Vice President, Secretary and Chief Administrative Officer from 1999 to 2009, Vice President, Secretary and Chief Administrative Officer from 1998 to 1999 and as Vice President, General Counsel and Secretary from 1997 to 1998. On March 5, 2009, Monaco filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code. Prior to 1997, Mr. Bond was the senior legal officer of another recreational vehicle manufacturer, after beginning his career in private practice.

14





Item 1A.    Risk Factors
Our financial condition, results of operations, and cash flows are subject to various risks, many of which are not exclusively within our control, which may cause actual performance to differ materially from historical or projected future performance. We have in place an Enterprise Risk Management ("ERM") process that involves systematic risk identification and mitigation covering the categories of Strategic, Financial, Operational, and Compliance risk. The goal of ERM is not to eliminate all risk, but rather to identify and assess risks; assign, mitigate and monitor risks; and report the status of our risks to the Management Risk Committee and the Board of Directors and its committees. The risks described below could materially and adversely affect our business, financial condition, results of operations, or cash flows.
We may not realize sufficient acceptance of our products in the marketplace in order to achieve our goal of regaining market share.
Key elements of our operating strategy are to focus on our Core markets and regain market share following the transition from our Advanced Exhaust Gas Recirculation ("EGR") only engine technology to a SCR engine technology and to pursue innovative technologies. Our success in regaining market share depends in part on our ability to achieve market acceptance of our existing and new products and to adapt to the swiftly emerging technologies which meet our customers' evolving needs. The extent to which, and the rate at which, we achieve market acceptance and penetration of our current and future products is a function of many variables including, but not limited to: price, safety, efficacy, reliability, conversion costs, competitive pressures, regulatory approvals, marketing and sales efforts, residual values, and general economic conditions affecting purchasing patterns. Any failure to gain and retain market share could have an adverse effect on our business, liquidity, results of operations and financial condition.
We operate in the highly competitive North American truck market and the markets in which we compete are subject to considerable cyclicality.
The North American truck market in which we operate is highly competitive. As a result, we and other manufacturers face competitive pricing and margin pressures that could adversely affect our ability to increase or maintain vehicle prices. Many of our competitors have greater financial resources, which may place us at a competitive disadvantage in responding to substantial industry changes, such as changes in governmental regulations that require major additional capital expenditures. In addition, certain of our competitors may have a lower overall cost structure.
Our ability to be profitable depends in part on the varying conditions in the truck, bus, mid-range diesel engine, and service parts markets, which are subject to cycles in the overall business environment and are particularly sensitive to the industrial sector, which generates a significant portion of the freight tonnage hauled. Truck and engine demand is also dependent on general economic conditions, interest rate levels and fuel costs, among other external factors.
Our business has significant liquidity requirements, and while recent operating results have improved our liquidity position, the Company’s overall credit profile and the cyclicality of the industry could have an adverse impact on our liquidity position.
Our business has significant liquidity requirements, and while our operating results over the last several years have improved our liquidity position, the Company’s overall credit profile and the cyclicality of the industry could have an adverse impact on our liquidity position. We believe that in the absence of significant extraordinary cash demands, our: (i) level of cash, cash equivalents, and marketable securities, (ii) current and forecasted cash flow from our Manufacturing operations and Financial Services operations, (iii) availability under various funding facilities, (iv) current and forecasted availability from various funding alliances, and (v) access to capital in the capital markets will provide sufficient funds to meet operating requirements, capital expenditures, investments, and financial obligations on both a short-term and long-term basis. Significant assumptions underlie our beliefs with respect to our liquidity position, including, among other things, assumptions relating to North American truck volumes for 2019, the continuing availability of trade credit from certain key suppliers, the ability to gain and retain market share and the absence of material adverse developments in our competitive market position, access to the capital markets or capital requirements, including the upcoming maturity of our April 2019 convertible notes. As a result, we cannot assure you that we will continue to have sufficient liquidity to meet our operating needs. In the event that we do not have sufficient liquidity, we may be required to seek additional capital, sell assets, reduce or cut back our operating activities or otherwise alter our business strategy.

15





Our substantial indebtedness could adversely affect our financial condition, cash flow, and operating flexibility.
Our significant amount of outstanding indebtedness and the covenants contained in our debt agreements could have important consequences for our operations. The terms of certain of our agreements limit our ability to obtain additional debt financing to fund future working capital, acquisitions, capital expenditures, engineering and product development costs, and other general corporate requirements; however, due to the recent refinancing transactions and amendments, we have additional incremental debt financing capacity as compared to the restrictions contained in our previous debt agreements. Other consequences for our operations could include:
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to use operating cash flow in other areas of our business because we must dedicate a portion of these funds to make significant interest payments on our indebtedness;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
limiting our ability to take advantage of business opportunities as a result of various restrictive covenants in our debt agreements; and
placing us at a competitive disadvantage compared to our competitors that have less debt, lower interest rates and/or less restrictive debt covenants.
Our ability to make required payments of principal and interest on our debt will depend on our future performance and the other cash requirements of our business. Our performance, to a certain extent, is subject to general economic, political, financial, competitive, and other factors that are beyond our control. We cannot provide any assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under certain of our debt agreements in an amount sufficient to enable us to service our indebtedness.
Our debt agreements contain certain restrictive covenants and customary events of default. These restrictive covenants limit our ability to take certain actions, such as, among other things: make restricted payments; incur additional debt and issue preferred or disqualified stock; create liens; create or permit to exist restrictions on our ability or the ability of our restricted subsidiaries to make certain payments or distributions; engage in sale-leaseback transactions; engage in mergers or consolidations or transfer all or substantially all of our assets; designate restricted and unrestricted subsidiaries; make certain dispositions and transfers of assets; limit the ability of our restricted subsidiaries to make distributions; enter into transactions with affiliates; and guarantee indebtedness. One or more of these restrictive covenants may limit our ability to execute our preferred business strategy, take advantage of business opportunities, or react to changing industry conditions. However, the refinancing transactions that closed in November 2017 (as discussed below) increase our flexibility in certain of the areas described above.
Upon an event of default, if not waived by our lenders, our lenders may declare all amounts outstanding as due and payable, which may cause cross-defaults under our other debt obligations. If our current lenders accelerate the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to our lenders on a timely basis, and there is no guarantee that we would be able to repay, refinance, or restructure the payments on such debt. Further, under our senior secured, term loan credit facility in an aggregate principal amount of $1.6 billion, which was refinanced in November 2017 (the "Term Loan Credit Agreement"), the $225 million Recovery Zone Facility Revenue Bonds (“Tax Exempt Bonds”) which obtained a junior lien in November 2017 on certain of the assets that underlie the Term Loan Credit Agreement and our amended and restated asset-based credit agreement in an aggregate principal amount of $125 million (the "Amended and Restated Asset-Based Credit Facility"), the lenders would have the right to foreclose on certain of our assets, which could have a material adverse effect on our Company.
Upon the occurrence of a "change of control" as specified in each of the principal debt agreements of our Manufacturing operations, we are required to offer to repurchase or repay such indebtedness. Under these agreements, a "change of control" is generally defined to include, among other things: (a) the acquisition by a person or group of at least 35 percent of our common stock, or, in the case of our 4.75% senior subordinated convertible notes due April 2019 (the "2019 Convertible Notes"), 50 percent of our common stock, (b) a merger or consolidation in which holders of our common stock own less than a majority of the equity in the resulting entity, or (c) replacement of a majority of the members of our Board of Directors by persons who were not nominated by our current directors. Under our Amended and Restated Asset-Based Credit Facility and our Term Loan Credit Agreement, a change in control would result in an immediate event of default, which would allow our lenders to accelerate the debt owed to them. Under the indentures or loan agreements for our debt securities, we may be required to offer to purchase the outstanding notes under such indentures at a premium upon a change in control. In any such event, we may not have sufficient funds available to repay amounts outstanding under these agreements, which may also cause cross-defaults under our other debt obligations. Further, under our Amended and Restated Asset-Based Credit Facility and our Term Loan Credit Agreement, the lenders could have the right to foreclose on certain of our assets, which could have a material adverse effect on our financial position and results of operations.

16





Past and potential downgrades in our debt ratings may adversely affect our liquidity, competitive position and access to capital markets.
The major debt-rating agencies routinely evaluate and rate our debt according to a number of factors, among which are our perceived financial strength and our ability to recapture market share. In May and July 2018, Moody’s, S&P and Fitch reaffirmed our corporate rating and the ratings of all but one of our securities as the NFC senior secured bank credit facility was upgraded by one level to B+ by Fitch. Additionally, each rating agency also changed their rating outlook from Stable to Positive during that same period. The rating agencies have noted concerns with respect to our high levels of debt but expect continued improvement in our credit metrics and cash flow generation. However any material deterioration in our market share recovery, warranty expense, earnings or cash flow generation could lead to a downgrade by the rating agencies in our credit ratings. Any downgrade in our credit ratings and any resulting negative publicity could adversely affect our continued access to trade credit on customary terms as well as our ability to access capital in the future under acceptable terms and conditions.
Our ability to execute our strategy is dependent upon our ability to attract, train and retain qualified personnel.
Our continued success depends, in large part, on our ability to identify, attract, develop, motivate and retain qualified employees in key functions and geographic areas. We have significant operations in foreign countries, including Canada, Mexico and Brazil, and, to effectively manage our global operations, we will need to engage our workforce around the world throughout their entire employee lifecycle.
In prior years we experienced the loss of certain personnel in connection with our reductions-in-force and voluntary separation programs. In the wake of those losses, we achieved a leaner and targeted workforce while reducing and controlling costs.  However, the need to focus on engaging our workforce throughout the employee life cycle and creating sustained high performance remains a critical focus for our organization. Failure to do so could impair our ability to execute our business strategy and could have an adverse effect on our business prospects.
Our parts business may be negatively impacted by our engine strategy.
As a result of our decision to use third party engines in some of our products and declining units in operation due to lower market share in recent years, we expect to experience a decline over time in our engine-related parts business revenue. In addition, our agreement to supply diesel engines to Ford in North America ended in December 2009. A primary business purpose of BDP is to supply aftermarket parts supporting the diesel engines supplied to Ford. We have experienced declines in BDP’s engine-related parts sales and profitability, and we expect to see further declines as the diesel engines transition out of service in the future.
There is inherent uncertainty in warranty estimates that may affect our operating results and cash flow.
Warranty estimates are established using historical information about the nature, frequency, timing, and average cost of warranty claims. However, warranty claims inherently have a high amount of variability in timing and severity and can be influenced by many external factors.  We accrue warranty related costs under standard warranty terms for the trucks and engines that we manufacture.  We also accrue warranty related costs for certain claims made outside the contractual obligation period as accommodations to our customers. In addition, with respect to our optional extended warranty contracts, we recognize losses on defined pools of extended warranty contracts when the expected costs for a given pool of contracts exceeds the related unearned revenues.
We have substantially reduced the number of our engine offerings which has reduced our new product warranty accruals and potentially reduces the warranty exposure associated with engine specific service contracts over time.
In 2016 and 2017, we refreshed our truck model line-up and introduced a new big bore 13L engine under the A26 brand.  Historically, warranty claims in product launch years have been higher compared to prior model years. We continue to refine the design and manufacturing processes to reduce the volume and severity of warranty claims.  We may incur additional charges for recalls and field campaigns to address issues as we identify opportunities to improve the design, efficiency, and manufacturing of our products. These charges could have an adverse effect on our financial condition, results of operations and cash flows.

17





We may discover defects or other issues in vehicles potentially resulting in delays in new model launches, recall campaigns, or increased warranty costs.
Meeting or exceeding many government-mandated safety standards is costly and often technologically challenging. Government safety standards require manufacturers to remedy defects related to motor vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that they do not comply with a safety standard. In addition, we may decide to take action with respect to a product issue not related to safety. Should we or government safety regulators determine that a safety standard noncompliance, safety-related defect or other product issue exists with respect to certain types of our vehicles, there could be a delay in the launch of a new model or a significant increase in warranty claims or a recall for existing models, the costs of which could be substantial.
Additionally, if we experience failure in some of our emissions components and the emission component defect rates of our engines exceed a certain level set by CARB and the EPA, those engines may be subject to corrective actions by these agencies, which may include extending the warranties of those engines. This could increase exposure beyond the stated warranty period to the relevant regulatory useful life of the engine, and these actions could have an adverse effect on our financial condition, results of operations and cash flows.
We could incur restructuring and impairment charges as we continue to evaluate our portfolio of assets and identify opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure.
We continue to evaluate our portfolio of assets in order 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 assessing the strategic fit to our Core business, to identify areas that are under-performing and/or non-strategic. For under-performing and non-strategic areas, we are evaluating whether to fix, divest, or close those areas. In addition, we are evaluating opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure. These actions could result in restructuring and related charges, including but not limited to asset impairments, employee termination costs, charges for pension and other postretirement contractual benefits, potential additional pension funding obligations, and pension curtailments, any of which could be significant, and could adversely affect our financial condition and results of operations.
We have substantial amounts of long-lived assets, including goodwill and intangible assets, which are subject to periodic impairment analysis and review. Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition, and general economic conditions, requires significant judgment. Declines in profitability due to changes in volume, market pricing, cost, or the business environment could result in charges that could have an adverse effect on our financial condition and results of operations.
Our Manufacturing operations are dependent upon third-party suppliers, including, in certain cases, single-source suppliers, making us vulnerable to supply shortages.
We obtain raw materials, parts and manufactured components from third-party suppliers. Any delay in receiving supplies could impair our ability to deliver products to our customers and, accordingly, could have an adverse effect on our business, financial condition, results of operations, and cash flows. The volatility in the financial markets and uncertainty in the automotive sector could result in exposure related to the financial viability of certain of our suppliers. Suppliers may also exit certain business lines, causing us to find other suppliers for materials or components and potentially delaying our ability to deliver products to customers, or our suppliers may change the terms on which they are willing to provide products to us, any of which could adversely affect our financial condition and results of operations. In addition, many of our suppliers have unionized workforces that could be subject to work stoppages as a result of labor relations issues. Some of our suppliers are the sole source for a particular supply item (e.g., the majority of engines, parts and manufactured components) and cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and contractual commitments that might be required by another supplier in order to provide the component or materials. In addition to the risks described above regarding interruption of supplies, which are exacerbated in the case of single-source suppliers, the exclusive supplier of a component potentially could exert significant bargaining power over price, quality, warranty claims or other terms relating to a component.

18





We are exposed to, and may be adversely affected by, interruptions to our computer and information technology systems and sophisticated cyber-attacks.
We rely on our information technology systems and networks in connection with many of our business activities. Some of these networks and systems are managed by third-party service providers and are not under our direct control. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, dealers, suppliers, employees and other sensitive matters. As with most companies, we have experienced cyber-attacks, attempts to breach our systems and other similar incidents, none of which have been material. Any future cyber incidents could, however, materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise personally identifiable information regarding customers or employees; and jeopardize the security of our facilities. A cyber incident could be caused by malicious outsiders using sophisticated methods to circumvent firewalls, encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware and other cyber-attacks are increasing in both frequency and sophistication and could create financial liability, subject us to legal or regulatory sanctions or damage our reputation with customers, dealers, suppliers and other stakeholders. We continuously seek to maintain a robust program of information security and controls, but the impact of a material information technology event could have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flows.
We have significant underfunded postretirement obligations.
On a U.S. generally accepted accounting principles ("GAAP") basis, the underfunded portion of our projected benefit obligation was $1.2 billion and $1.4 billion for pension benefits at October 31, 2018 and 2017, respectively, and $0.9 billion and $1.1 billion for postretirement healthcare benefits at October 31, 2018 and 2017, respectively. In calculating these amounts, we have assumed certain mortality rates, interest rates and growth rates of retiree medical costs. The fair value of invested assets held in our postretirement benefit plans are measured at October 31 each year and are used to compute funded status. Future mortality assumption changes and growth rates of retiree medical costs actually experienced by the postretirement benefit plans, as well as reductions in interest rates and the investment performance of the assets, could have an adverse impact on our underfunded postretirement obligations, financial condition, results of operations and cash flows.
The continued restructuring and rationalization of our business could also accelerate our pension funding obligations under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The volatility in the financial markets affects the valuation of our pension assets and liabilities, resulting in potentially higher pension costs and higher levels of under-funding in future periods. The requirements set forth in ERISA and the Internal Revenue Code of 1986, as amended (the "IRC"), as applicable to our U.S. pension plans (including timing requirements) mandated by the Pension Protection Act of 2006 (the "PPA") to fully fund our U.S. pension plans, net of any current or possible future legislative or governmental agency relief, could also have an adverse impact on our business, financial condition, results of operations and cash flows even though the pension funding relief legislation, Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, the Moving Ahead for Progress in the 21st Century Act ("MAP-21 Act") and the Highway and Transportation Funding Act of 2014 ("HATFA") and the Bi-Partisan Budget Act of 2015, will reduce our funding requirements over the next four years.
Implementation of our emissions strategy, federal regulations and fuel economy rules may increase costs.
Recent and future changes to on-highway emissions or performance standards (including fuel efficiency, noise, and safety), as well as compliance with additional environmental requirements, are expected to continue to add to the cost of our products and increase the engineering and product development programs of our business. Implementation of our emissions strategy is ongoing and we may experience increased costs or compliance or timing risks as we continue implementation of OBD systems requirements as they phase in and manage GHG emission credit balances. The EPA, the U.S. Department of Transportation and the government of Canada have issued final rules on GHG emissions and fuel economy for medium and heavy duty vehicles and engines. The emission standards establish required minimum fuel economy and GHG emissions levels for both engines and vehicles primarily through the increased use of existing technology. The rules, which apply to our engines and vehicles, initially required EPA certification for vehicles and engines to GHG emissions standards in calendar year 2014 and were fully implemented in model year 2017. EPA and NHTSA adopted a second phase of GHG emissions reductions that will apply in three emission standards beginning in model year 2021 and culminating in model year 2027. These rules reduce emission levels for engines and vehicles. In addition, California has adopted GHG emissions standards for heavy duty vehicles and engines, stated its intention to lower NOx standards for California certified engines and requested EPA to lower NOx emission standards as well. In addition to lower NOx, EPA and California may consider other actions, including extending warranty periods, mandating sales of zero emission trucks, and requiring certification of zero emission heavy duty vehicles. In addition, we are responsible for emission certification for certain partner companies which can introduce complexity into the certification process.

19





These standards will require significant investments of capital, will significantly increase costs of development for engines and vehicles, and will require us to incur administrative costs arising from implementation of the standards. These regulatory proposals under consideration or those that are proposed in the future may set standards that are difficult to achieve or adversely affect our results of operations due to increased research, development, and warranty costs.
Our business may be adversely impacted by work stoppages and other labor relations matters.
We are subject to risk of work stoppages and other labor relations matters because a significant portion of our workforce is unionized. As of October 31, 2018, approximately 8,200 of our hourly workers and approximately 700 of our salaried workers were represented by labor unions and were covered by collective bargaining agreements. Many of these agreements include provisions that limit our ability to realize cost savings from restructuring initiatives such as plant closings and reductions in workforce. Our current master collective bargaining agreement with the United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") expired in October 2018 and we are currently in negotiations with the UAW to enter into a new collective bargaining agreement.
Any strikes, threats of strikes, arbitration or other resistance in connection with the negotiation of new labor agreements, or increases in costs under a newly negotiated labor agreement, could adversely affect our business as well as impair our ability to implement further measures to reduce structural costs and improve production efficiencies. A lengthy strike that involves a significant portion of our manufacturing facilities could have an adverse effect on our financial condition, results of operations, and cash flows.
We are involved in pending litigation, and an adverse resolution of such litigation may adversely affect our business, financial condition, and results of operations and cash flows.
Litigation can be expensive, lengthy, and disruptive to normal business operations. The results of complex legal proceedings are often uncertain and difficult to predict. An unfavorable outcome of a particular matter described in our periodic filings or any future legal proceedings could have an adverse effect on our business, financial condition, and results of operations or cash flows.
We are currently involved in a number of pending litigation matters. For additional information regarding certain lawsuits in which we are involved, see Note 13, Commitments and Contingencies, to our consolidated financial statements.
A small number of our stockholders have significant influence over our Board of Directors.
In October 2012, we entered into settlement agreements with two of our significant stockholders, Carl C. Icahn and several entities controlled by him (collectively, the "Icahn Group") and Mark H. Rachesky, MD, and several entities controlled by him (collectively, the "MHR Group") pursuant to which the Icahn Group and the MHR Group each had one representative appointed to our Board of Directors, and together the Icahn Group and the MHR Group mutually agreed upon a third representative appointed to our Board of Directors. In July 2013, we entered into amended settlement agreements with the Icahn Group and the MHR Group pursuant to which the Icahn Group and the MHR group each had two representatives nominated for election as directors at our 2014 annual meeting, and each has continued to have two representatives nominated for election each year. On September 5, 2016, we entered into a Stockholder Agreement with TRATON Group which, among other things, provides for the appointment of two individuals designated by TRATON Group to our Board of Directors, subject to our approval, and on February 28, 2017, we appointed the two individuals designated by TRATON Group to our Board of Directors. As of October 31, 2018, based on filings made with the SEC and other information made available to us as of that date, we believe that: (i) the Icahn Group held approximately 16.7 million shares, or 16.9% of our outstanding common stock, (ii) the MHR Group held approximately 16.3 million shares, or 16.5% of our outstanding common stock, (iii) TRATON Group held approximately 16.6 million shares, or 16.8% of our outstanding common stock, and (iv) the Icahn Group, the MHR Group, TRATON Group, and two other stockholders, collectively hold approximately 70% of our outstanding common stock.
As a result of the foregoing, these stockholders are able to exercise significant influence over the election of our Board of Directors as well as matters requiring stockholder approval. Further, this concentration of ownership may adversely affect the market price of our common stock.

20





Provisions in our charter and by-laws, and Delaware law could delay and discourage takeover attempts that stockholders may consider favorable.
Certain provisions of our certificate of incorporation and by-laws, and applicable provisions of Delaware corporate law, may make it more difficult for a third party to acquire control of us or change our Board of Directors and management, or may prevent such acquisition or change. These provisions include:
the ability of our Board of Directors to issue so-called "flexible" preferred stock;
a provision for any vacancies on our Board of Directors to be filled only by the remaining directors;
the inability of stockholders to act by written consent or call special meetings;
advance notice procedures for stockholder proposals to be brought before an annual meeting of our stockholders; and
Section 203 of the Delaware General Corporation Law, which generally restricts us from engaging in certain business combinations with a person who acquires 15% or more of our common stock for a period of three years from the date such person acquired such common stock, unless stockholder or Board approval is obtained prior to the acquisition
The foregoing provisions may adversely affect the marketability of our common stock by discouraging potential investors from acquiring our stock. In addition, these provisions could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, or impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders.
We must comply with numerous federal security laws, procurement regulations, and procedures, as well as the rules and regulations of foreign jurisdictions, and our failure to comply could adversely affect our business.
We must observe laws and regulations relating to the formation, administration and performance of federal government contracts that affect how we do business with our clients and impose added costs on our business. For example, the Federal Acquisition Regulations, Defense Federal Acquisition Regulation Supplement, foreign government procurement regulations and the industrial security regulations of the Department of Defense and related laws include provisions that:
allow our government clients to terminate or not renew our contracts if we come under foreign ownership, control or influence;
allow our government clients to terminate existing contracts for the convenience of the government;
require us to prevent unauthorized access to classified information; and
require us to comply with laws and regulations intended to promote various social or economic goals.
We are subject to industrial security regulations of the U.S. Departments of State, Commerce and Defense and other federal agencies that are designed to safeguard against foreigners' access to classified or restricted information. Similarly, our international operations are subject to the rules and regulations of foreign jurisdictions. If we were to come under foreign ownership, control or influence, we could lose our facility security clearances, which could result in our federal government clients terminating or deciding not to renew our contracts and could impair our ability to obtain new contracts.
A failure to comply with applicable laws, regulations, policies or procedures, including federal regulations regarding the procurement of goods and services and protection of classified information, could result in contract termination, loss of security clearances, suspension or debarment from contracting with the federal government, civil fines and damages and criminal prosecution and penalties, any of which could adversely affect our business.
Our products are subject to export limitations and we may be prevented from shipping our products to certain nations or buyers.
We are subject to federal licensing requirements with respect to the sale and support in foreign countries of certain of our products and the exporting of components for our products in foreign countries. In addition, we are obligated to comply with a variety of federal, state and local laws and regulations as well as procurement policies, both domestically and abroad, governing certain aspects of our international sales and support, including regulations promulgated by, among others, the U.S. Departments of Commerce, Defense, State and Justice.

21





Such licenses may be denied for reasons of U.S. national security or foreign policy. In the case of certain large orders for exports of defense equipment, the Department of State must notify Congress at least 15 to 30 days, depending on the size and location of the sale, prior to authorizing certain sales of defense equipment and services to foreign governments. During that time, Congress may take action to block the proposed sale. We can give no assurances that we will continue to be successful in obtaining the necessary licenses or authorizations or that Congress will not prevent or delay certain sales. Any significant impairment of our ability to sell products outside of the U.S. could negatively impact our financial condition, results of operations and cash flows.
For products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, we are subject to U.S. laws, sanctions, embargoes, and regulations governing international trade and exports, including, but not limited to, International Traffic in Arms Regulations, Export Administration Regulations, the Foreign Sales program and the Office of Foreign Assets Control, U.S. Department of the Treasury. A determination by the U.S. government that we have failed to comply with one or more of these export controls or trade sanctions could result in civil or criminal penalties, including the imposition of significant fines, denial of export privileges, loss of revenues from certain customers, and debarment from participation in U.S. government contracts.
We are subject to the Foreign Corrupt Practices Act (the "FCPA") and other laws which prohibit improper payments to foreign governments and their officials by U.S. and other business entities. We operate in countries known to experience corruption. Our operations in such countries create the risk of an unauthorized payment by one of our employees or agents that could be in violation of various laws including the FCPA.
Additionally, the failure to obtain applicable governmental licenses, clearances, or approvals could adversely affect our ability to continue to service the government contracts we maintain. Exports of some of our products to certain international destinations may require shipment authorization from U.S. export control authorities, including the U.S. Departments of Commerce and State, and authorizations may be conditioned on end-use restrictions.
Our international business is also highly sensitive to changes in foreign national priorities and government budgets. Sales of military products are affected by defense budgets (both in the U.S. and abroad) and U.S. foreign policy.
Our operations are subject to environmental, health and safety laws and regulations that could result in liabilities to us.
Our operations are subject to environmental, health and safety laws and regulations, including those governing discharges to air and water; the management and disposal of hazardous substances; the cleanup of contaminated sites; and health and safety matters. We could incur material costs, including cleanup costs, civil and criminal fines, penalties and third-party claims for cost recovery, property damage or personal injury as a result of violations of or liabilities under such laws and regulations. Contamination has been identified at and in the vicinity of some of our current and former properties and at properties which received wastes from current or former Company locations for which we have established financial reserves. The ultimate cost of remediating contaminated sites is difficult to accurately predict and could exceed our current estimates. In addition, as environmental, health, and safety laws and regulations have tended to become stricter, we could incur additional costs complying with requirements that are promulgated in the future. These include climate change regulation, which could increase the cost of operations through increased energy costs.
We may not achieve all of the expected benefits from our cost saving initiatives.
We have implemented a number of cost saving initiatives, including the consolidation of our North American truck and engine engineering operations, continued reductions in discretionary spending, and employee headcount reductions. In addition, we continue to evaluate additional options to improve the efficiency and performance of our operations. This includes evaluating our portfolio of assets, which could include 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 have made certain assumptions in estimating the anticipated impact of our cost saving initiatives, which include the estimated savings from the elimination of certain open positions. These assumptions may turn out to be incorrect due to a variety of factors. In addition, our ability to realize the expected benefits from these initiatives is subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. Some of our cost saving measures may not have the impact on our profitability that we currently project or we may not be able to sustain the savings. If we are unsuccessful in implementing these initiatives or if we do not achieve our expected results, our results of operations and cash flows could be adversely affected.

22





We may not achieve all of the expected benefits from our acquisitions, joint ventures, or strategic alliances.
We cannot provide any assurances that our acquisitions, joint ventures, or strategic alliances will generate all of the expected benefits, including the cost savings and strategic advantages that are anticipated from the strategic alliance with TRATON Group. In addition, we cannot assure you that disputes will not arise with our joint venture partners and that such disputes will not lead to litigation or otherwise have an adverse effect on the joint ventures or our relationships with our joint venture partners. Failure to successfully manage and integrate these acquisitions, joint ventures, and strategic alliances could adversely impact our financial condition, results of operations and cash flows. We continue to evaluate opportunities to further restructure our business in an effort to optimize our cost structure, which could include, among other actions, additional rationalization of certain of our acquisitions, joint ventures, or strategic alliances.
We are exposed to political, economic, and other risks that arise from operating a multinational business.
We have significant operations in foreign countries, primarily in Canada, Mexico and Brazil. Accordingly, our business is subject to the political, economic, and other risks that are inherent in operating a multinational company. These risks include, among others:
trade protection measures and import or export licensing requirements;
the imposition of foreign withholding taxes on the remittance of foreign earnings to the U.S.;
difficulty in staffing and managing international operations and the application of foreign labor regulations;
multiple and potentially conflicting laws, regulations, and policies that are subject to change;
currency exchange rate risk; and
changes in general economic and political conditions in countries where we operate, particularly in emerging markets.
Our ability to use net operating loss ("NOL") carryovers to reduce future tax payments could be negatively impacted if there is a change in our ownership or a failure to generate sufficient taxable income.
As of October 31, 2018, we had $2.7 billion of NOL carryforwards with which to offset our future taxable income for U.S. federal income tax reporting purposes. Presently, there is no annual limitation on our ability to use U.S. federal NOLs to reduce future income taxes. However, we may be subject to substantial annual limitations provided by the IRC if an "ownership change," as defined in Section 382 of the IRC, occurs with respect to our capital stock. Generally, an ownership change occurs if certain persons or groups increase their aggregate ownership by more than 50 percentage points of our total capital stock in a three-year period. If an ownership change occurs, our ability to use domestic NOLs to reduce taxable income is generally limited to an annual amount based on (i) the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate plus (ii) under certain circumstances, realized built-in gains on certain assets held prior to the ownership change for the first five years after the ownership change. Although NOLs that exceed the Section 382 limitation in any year continue to be allowed as carryforwards for the remainder of the 20-year carryforward period and can be used to offset taxable income for years within the carryover period subject to the limitation in each year, the use of the remaining NOLs for the loss year will be prohibited if the carryover period for any loss year expires. If we should fail to generate a sufficient level of taxable income prior to the expiration of the NOL carryforward periods, then we will lose the ability to apply the NOLs as offsets to future taxable income. Similar limitations also apply to certain U.S. federal tax credits.  As of October 31, 2018, we had $197 million of U.S. federal tax credits that would be subject to a limitation upon a change in ownership with carryforward periods of up to 20 years.
U.S. federal income tax reform could adversely affect us.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act") was signed into U.S. law, significantly reforming the IRC. The Tax Act, among other things, includes a reduction to the statutory corporate income tax rate from 35% to 21%, effective January 1, 2018; a mandatory inclusion in taxable income for the deemed repatriation of earnings of the Company’s foreign subsidiaries; changes to limits on the deductions for executive compensation and interest expense; a tax on global intangible low‐taxed income; a base erosion anti‐abuse tax; and a deduction for foreign derived intangible income. The changes attributable to the Tax Act are complex and subject to additional guidance to be issued by the U.S. Treasury and the Internal Revenue Service. In addition, the reaction to the federal tax changes by the individual states is evolving. While we continue to examine the impact the Tax Act may have on our business, the overall impact of the Tax Act is uncertain, and our business and financial condition could be adversely affected. The estimated impact of the Tax Act is based on our management’s current knowledge and assumptions and recognized impacts could be materially different from current estimates based on our actual results and our further analysis of the new law.

23





New tariffs and evolving trade policy between the United States and other countries, including China, may have an adverse effect on our business and results of operations.
We have a global supply chain of material costs for trucks and parts sold. Recent steps taken by the United States government to apply and consider applying tariffs on certain products and materials, including steel, could potentially disrupt our existing supply chains and impose additional costs on our business, including costs with respect to raw materials upon which our business depends. The increased costs may negatively impact our margins as we may not be able to pass on the additional costs by increasing the prices of our products. As a result, we continue to monitor these tariffs and the evolving trade policy of the United States and are actively looking for opportunities to mitigate their effects through a combination of design changes, material substitution, and alternate supplier resourcing. While we believe our exposure to the potential increased costs of these tariffs is no greater than the industry as a whole, our business and results of operations may be adversely affected if our efforts to mitigate their effects are unsuccessful.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our Truck segment operates five manufacturing and assembly facilities, which contain in the aggregate approximately five million square-feet of floor space. Of these five facilities, four are located in the U.S. and one is located in Mexico. Three facilities are owned and two facilities are subject to leases. Four plants manufacture and assemble trucks, buses, and chassis. One plant is used to build diesel engines.
Our Parts segment leases six distribution centers in the U.S., two in Canada, one in Mexico, and one in South Africa.
Our Global Operations segment owns and operates manufacturing plants in both Brazil and Argentina, which contain a total of 1 million square-feet of floor space for use by our South American engine subsidiaries.
Our Financial Services segment, the majority of whose activities are conducted at our headquarters in Lisle, Illinois, also leases office space in Mexico.
Our principal product development and engineering facilities are currently located in Lisle, Illinois; Melrose Park, Illinois; Madison Heights, Michigan; New Carlisle, Indiana; and Monterrey, Mexico. Additionally, we own or lease other significant properties in the U.S., Canada and Mexico including vehicle and parts distribution centers, sales offices, and our headquarters in Lisle, Illinois. Not included above is the Waukesha, Wisconsin foundry which was leased to a third party in April 2015, the rail car manufacturing plant that was exited in February 2018 and the Melrose Park Engine Plant whose operations ceased in May 2018.
We believe that all of our facilities have been adequately maintained, are in good operating condition, and are suitable for our current needs. These facilities, together with planned capital expenditures, are expected to meet our needs in the foreseeable future. Our Lisle, Illinois and Brookfield, Wisconsin, properties are subject to mortgages in favor of the lenders under our Term Loan Credit Agreement.
Item 3.
Legal Proceedings
 
The information required to be set forth under this heading is incorporated by reference from Note 13, Commitments and Contingencies, to the Consolidated Financial Statements included in Part II, Item 8.
Item 4.
Mine Safety Disclosures
Not applicable.

24





PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Securities
Market Information
Our common stock is listed on the New York Stock Exchange ("NYSE"), under the stock symbol "NAV."
Number of Holders
As of November 30, 2018, there were approximately 6,464 holders of record of our common stock.
Dividend Policy
Holders of our common stock are entitled to receive dividends when and as declared by the Board of Directors out of funds legally available therefore, provided that, so long as any shares of our preference stock are outstanding, no dividends (other than dividends payable in common stock) or other distributions (including purchases) may be made with respect to the common stock unless full cumulative dividends, if any, on our shares of preference stock have been paid. Under the General Corporation Law of the State of Delaware, dividends may only be paid out of surplus or out of net profits for the year in which the dividend is declared or the preceding year, and no dividend may be paid on common stock at any time during which the capital of outstanding preference stock exceeds our net assets. Certain debt instruments contain terms that include negative covenants and restrictions, including, among others, certain limitations on dividends. We have not paid dividends on our common stock since 1980.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities by us or affiliates during the three months ended October 31, 2018.
Purchases of Equity Securities
There were no purchases of equity securities by us or affiliates during the three months ended October 31, 2018.


25



Stock Performance
The following graph compares the five-year cumulative total returns of Navistar International Corporation common stock, the S&P 500 Index, and the S&P Construction, Farm Machinery and Heavy Truck Index.
The comparison graph assumes $100 was invested on October 31, 2013 in our common stock and in each of the indices shown and assumes reinvestment of all dividends. Data is complete through October 31, 2018. Shareholder returns over the indicated period are based on historical data and should not be considered indicative of future shareholder returns.
capture002.jpg
 
As of October 31,
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Navistar International Corporation
$
100

 
$
98

 
$
34

 
$
62

 
$
117

 
$
93

S&P 500 Index - Total Returns
100

 
117

 
123

 
129

 
159

 
171

S&P Construction, Farm Machinery, and Heavy Truck Index
100

 
118

 
87

 
104

 
160

 
139

The above graph uses peer group only performance (excludes us from the peer group). Peer group indices use beginning of periods' market capitalization weighting. Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2018. Index Data: Copyright Standard and Poor’s, Inc. Used with permission. All rights reserved.


26



Item 6.
Selected Financial Data
Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the notes to the accompanying consolidated financial statements for additional information regarding the financial data presented below, including matters that might cause this data not to be indicative of our future financial condition or results of operations.
Five-Year Summary of Selected Financial and Statistical Data
 
As of and for the Years Ended October 31,
(in millions, except per share data)
2018
 
2017
 
2016
 
2015
2014
RESULTS OF OPERATIONS DATA
 
 
 
 
 
 
 
 
Sales and revenues, net
$
10,250

 
$
8,570

 
$
8,111

 
$
10,140

$
10,806

Income (loss) from continuing operations before taxes
420

 
64

 
(32
)
 
(103
)
(556
)
Income tax expense
(52
)
 
(10
)
 
(33
)
 
(51
)
(26
)
Income (loss) from continuing operations
368

 
54

 
(65
)
 
(154
)
(582
)
Income from discontinued operations, net of tax

 
1

 

 
3

3

Net income (loss)
368

 
55

 
(65
)
 
(151
)
(579
)
Less: Net income attributable to non-controlling interests
28

 
25

 
32

 
33

40

Net income (loss) attributable to Navistar International Corporation
$
340

 
$
30

 
$
(97
)
 
$
(184
)
$
(619
)
Amounts attributable to Navistar International Corporation common shareholders:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations net of tax
$
340

 
$
29

 
$
(97
)
 
$
(187
)
$
(622
)
Income from discontinued operations, net of tax

 
1

 

 
3

3

Net income (loss)
$
340

 
$
30

 
$
(97
)
 
$
(184
)
$
(619
)
Basic earnings (loss) per share
 
 
 
 
 
 
 
 
Continuing operations
$
3.44

 
$
0.31

 
$
(1.19
)
 
$
(2.29
)
$
(7.64
)
Discontinued operations

 
0.01

 

 
0.04

0.04

Net income (loss)
$
3.44

 
$
0.32

 
$
(1.19
)
 
$
(2.25
)
$
(7.60
)
Diluted earnings (loss) per share
 
 
 
 
 
 
 
 
Continuing operations
$
3.41

 
$
0.31

 
$
(1.19
)
 
$
(2.29
)
$
(7.64
)
Discontinued operations

 
0.01

 

 
0.04

0.04

Net income (loss)
$
3.41

 
$
0.32

 
$
(1.19
)
 
$
(2.25
)
$
(7.60
)
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
Basic
98.9

 
93.0

 
81.7

 
81.6

81.4

Diluted
99.6

 
93.5

 
81.7

 
81.6

81.4

BALANCE SHEET DATA
 
 
 
 
 
 
 
 
Total assets
$
7,230

 
$
6,135

 
$
5,653

 
$
6,649

$
7,392

Long-term debt:(A)
 
 
 
 
 
 
 
 
Manufacturing operations
$
2,965

 
$
3,121

 
$
3,025

 
$
3,059

$
2,814

Financial services operations
1,556

 
768

 
972

 
1,088

1,065

Total long-term debt
$
4,521

 
$
3,889

 
$
3,997

 
$
4,147

$
3,879

Redeemable equity securities
$

 
$

 
$

 
$

$
2

___________________________
(A) Exclusive of current portion of long-term debt.


27



Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("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. 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 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.
Executive Overview
We are an international manufacturer of International® brand commercial and military trucks, proprietary brand diesel engines, and 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 conducted in 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 truck markets. We also provide retail, wholesale, and lease financing services for our trucks and parts.
Executive Summary
During 2018, we continued to take actions that we believe will improve our performance. Going forward, our strategic vision includes areas of focus around being customer-centric, driving operational excellence, focusing on our Core business, pursuing business transformation, leveraging our alliance with TRATON Group, and promoting cross-functional teamwork with a winning culture. We believe our strategy will enable us to build upon our accomplishments and become the number one choice and the most customer focused, innovative and value driven truck and bus solution provider in the Americas.
In November 2017, we issued $1.1 billion in aggregate principal amount of 6.625% senior notes due 2026 (“6.625% Senior Notes”) and signed a definitive Term Loan Credit Agreement relating to a seven-year senior secured term loan credit facility in an aggregate principal amount of $1.6 billion. The proceeds from the offering of our 6.625% Senior Notes were used to purchase a portion of our previously existing 8.25% Senior Notes and to pay accrued and unpaid interest thereon, and pay the associated prepayment premiums, certain transaction fees and expenses incurred in connection with the 6.625% Senior Notes. A portion of the proceeds from our Term Loan Credit Agreement were used to repay all outstanding loans under our previously existing Senior Secured Term Loan Credit Facility (the “Term Loan"), to pay accrued and unpaid interest thereon, and pay certain transaction fees and expenses incurred in connection with the new Term Loan Credit Agreement, and to repurchase the remaining outstanding 8.25% Senior Notes and associated accrued but unpaid interest thereon. The remainder of the proceeds of the Term Loan Credit Agreement will be used for ongoing working capital purposes and general corporate purposes.
In November 2017, we entered into the First Amendment to Loan Agreement with The County of Cook, Illinois and the First Amendment to Loan Agreement with the Illinois Finance Authority (“Tax Exempt Bond Amendments”) to adjust various restrictive covenants included in the loan agreements relating to the Tax Exempt Bonds, including to permit the Company to incur secured debt of up to $1.7 billion, in exchange for a coupon increase from 6.50% to 6.75% and the grant of a junior priority lien on certain collateral securing the Company's previously existing Term Loan and the new Term Loan Credit Agreement.
In July 2018, NFC entered into a new agreement whereby NFC borrowed an aggregate principal amount of $400 million under a new seven-year senior secured term loan facility (the "NFC Term Loan"). The proceeds of the NFC Term Loan were used to pay certain fees and expenses in connection with the NFC Term Loan and to make an intercompany loan of $150 million to our Manufacturing operations. The remainder of the proceeds of the NFC Term Loan will be used for other general NFC purposes.
In October 2018, we repaid in full our 4.5% Senior Subordinated Convertible Notes issued in October 2013. The repayment of the outstanding principal of $200 million at maturity was funded with cash on hand. 
In November 2018, we entered into a definitive agreement with Cerberus Capital Management, L.P. and its affiliates (“Cerberus”) to sell a 70% equity interest in our defense business, Navistar Defense, LLC (“Navistar Defense”), for a total value of approximately $140 million, adjusted for certain current year chargeouts. The total value is subject to additional adjustments related to working capital, the transfer of certain liabilities and commitments, and other items. The agreement also includes an exclusive long term supply agreement for commercial parts and chassis. The transaction is subject to customary closing conditions, including regulatory clearances. We expect the transaction to close in the first quarter of 2019.

28





We remain committed to product investment to increase customer value and to focus on our Core markets. In January 2018, we announced the launch of the International® HV™ Series Mid-Range Diesel which includes a bridge formula truck for the concrete industry. In February 2018, we announced the launch of the newly updated IC Bus® RE Series Type D school bus featuring remote diagnostics connectivity solutions. In March 2018, we announced the launch of the International® MV™ Series Mid-Range Diesel model, our new medium-duty truck. In November 2018, we announced the launch of the International® CV™ Series, our new class 4/5 truck. With our strategic partner, TRATON Group, we believe we will have a fully integrated proprietary powertrain starting in 2020. We expect to launch an electric medium-duty truck and electric school bus in 2020. We also expect to launch a next generation connectivity module allowing feature sharing.
2018 Financial Summary
Continuing Operations Results
Continuing Operations Results — Consolidated net sales and revenues were $10.3 billion in 2018, an increase of 20% compared to 2017. The increase primarily reflects higher volumes in our Core markets.
In 2018, we earned income from continuing operations before income taxes of $420 million compared to $64 million in 2017. Our gross margin increased by $400 million primarily due to the impact of higher volumes and a decrease in used truck losses. Also, during 2018, we recorded a gain of $70 million representing the net present value of our recovery from the Deepwater Horizon Settlement Program in Other Income, net and $46 million of charges related to the extinguishment of unamortized debt issuance costs and tender premium payments associated with the repurchase of our 8.25% Senior Notes and refinancing of our previous Term Loan.
In 2018, we recognized income tax expense from continuing operations of $52 million, compared to income tax expense of $10 million in the prior year. Income tax expense in both periods was impacted by earnings, geographical mix and certain discrete items. The change in income tax expense was also impacted by a $28 million intraperiod allocation benefit in domestic continuing operations due to certain post retirement plan remeasurements and a release of various state uncertain tax position liabilities of $14 million, both recorded in 2017.
In 2018, after income taxes, income from continuing operations attributable to NIC was $340 million, or $3.41 per diluted share, compared to income of $29 million, or $0.31 per diluted share, in 2017.
In 2018, consolidated net income from continuing operations attributable to Navistar International Corporation ("NIC"), before manufacturing interest, taxes, depreciation and amortization expenses (“EBITDA”) was $838 million, compared to EBITDA of $527 million in 2017. Excluding certain net adjustments of $12 million and $55 million in 2018 and 2017, respectively, Adjusted EBITDA was $826 million in 2018 compared to $582 million in 2017. EBITDA and Adjusted EBITDA are not determined in accordance with U.S. GAAP, nor are they presented as alternatives to U.S. GAAP measures. For more information regarding this non-GAAP financial information, see Consolidated EBITDA and Adjusted EBITDA.
We ended the year 2018 with $1,421 million of consolidated cash, cash equivalents and marketable securities, compared to $1,076 million as of October 31, 2017. The increase in consolidated cash, cash equivalents and marketable securities was primarily attributable to net income, increases in accounts payable and other current and noncurrent liabilities, proceeds from the sales of property and equipment, financed lease obligations and the issuance of long-term and securitized debt partially offset by increases in accounts and finance receivables, inventory and other noncurrent assets, capital expenditures, purchases of equipment leased to others, and payments on securitized and long-term debt and dividends paid with respect to non-controlling interests.
Business Outlook and Key Trends
We continually look for ways to improve the efficiency and performance of our operations, and our focus is on improving our Core businesses. Certain trends have affected our results of operations for 2018 as compared to 2017 and 2016. These trends, as well as the key trends that we expect will impact our future results of operations, are as follows:
Engine Strategy and Emissions Standards Compliance—We are focused on new product introductions, enhancements of current products, quality improvements and continuous material cost-reductions across our truck and bus product lines.  We have shifted our investment focus from engines to trucks including developing driver-centric designs. We are also expanding our powertrain offerings with a mix of proprietary engines and Cummins engines.  We have incurred significant research and development and tooling costs to design and produce our product lines to meet the EPA and CARB on-highway HDD emissions standards, including OBD requirements. GHG phase 2 regulations will further drive up significant investments in product development by us and our competitors. CARB also continues to advocate for stricter emission standards, OBD requirements and in-use oversight. These emissions standards have and will continue to result in significant increases in the costs of our products.

29





TRATON Group Alliance—We and TRATON Group have a similar vision for the role of technology, including the importance of driver-focused open architecture solutions. We expect the alliance will be a source of powertrain options and other high-value technologies, including advanced driver assistance systems, connected vehicle solutions including platooning and autonomous technologies, electric vehicles, and cab and chassis subsystems. We expect to have a fully integrated proprietary powertrain starting in 2020, launch the next generation connectivity module allowing feature sharing, and launch an electric medium-duty truck and electric school bus as early as 2020.
Core Truck Market—The Core truck market in which we compete are cyclical in nature and are strongly influenced by macroeconomic factors such as industrial production, demand for durable goods, construction spending, business investment, oil prices, and consumer confidence and spending. Class 8 industry volume in 2018 increased 34% over 2017, and we anticipate positive momentum will continue in 2019 as general economic and industry-specific indicators are trending well into the next year. In addition, improved new truck fuel economy along with solid freight demand and rates show the trucking industry remains healthy. However, supplier capacity constraint and driver shortage may continue to negatively impact Class 8 truck demand. The medium truck and school bus markets are expected to maintain strong demand in 2019. We anticipate that our Core market retail industry deliveries will range between 395,000 units to 425,000 units for 2019.
Used Truck Inventory—Our gross used truck inventory decreased to approximately $154 million at October 31, 2018 from $206 million at October 31, 2017, offset by reserves of $31 million and $110 million, respectively. During 2018, additions to our used truck reserves were $50 million, compared to $111 million and $187 million in 2017 and 2016, respectively. The decline was primarily due to the implementation of a shift in market mix in 2017 for our used trucks to include an increase in volume to certain export markets that have a lower price point as compared to sales through our domestic channels, and to lower domestic pricing to enable higher sales velocity. We have decreased our gross used truck inventory balances and inventory reserves as a result of the shift in market mix and change in pricing strategy. We continue to seek alternative channels to sell our used trucks.
Parts—The Parts business remains a significant source of revenue and profit. We are focusing on retail customer segmentation and improving dealer-lead generation. Our private label brands help provide All-Make parts to customers, attract incremental price sensitive customers, and offset the decline in late-in-lifecycle products. We are leveraging technology such as eCommerce to attract and retain new customers, to expand our existing customers’ portfolio of products, and to improve the ease of doing business. We have embraced improving uptime via parts availability, dedicated same-day deliveries and expanded hours at our parts distribution centers.
Navistar Defense Sales—Our Navistar Defense sales were $534 million in 2018, compared to $302 million in 2017 and $252 million in 2016. The 2018 Navistar Defense sales primarily consisted of refurbishment and upgrades of MaxxPro vehicles to “like new” condition for foreign militaries, deliveries of military commercial off the shelf variants ("MILCOTS") and new MaxxPro vehicles to foreign militaries, spare parts, and technical support service.
We believe now is the right time to enter into a strategic transaction to reduce our capital investment in Navistar Defense. Partnering with Cerberus reduces our exposure to certain unpredictability inherent in military sales, and allows us to participate in the potential upside of the defense business through an ongoing equity stake and our exclusive long-term supply agreement for MILCOTS chassis and commercial parts.
Warranty Costs—Warranty expense continues to reflect our current product portfolio and our commitment to quality and customer uptime. Warranty expense as a percentage of manufacturing revenue declined to 1.7% from 2.4% a year ago. We recognized a benefit for adjustments to pre-existing warranties of $9 million in 2018 and $1 million in 2017 compared to charges for adjustments to pre-existing warranties of $77 million in 2016. This benefit was due to a decrease in claim frequency across both the Medium Duty and Big Bore engine families in our Truck segment. For more information, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Income Taxes—At October 31, 2018, we had $2.7 billion of U.S. federal net operating loss carryforwards and $197 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 carryforward periods of up to 20 years. We also have state and foreign net operating losses that are available to reduce cash payments of state and foreign taxes in future periods.
We maintain valuation allowances on our U.S. and certain foreign deferred tax assets because it is more likely than not that those deferred tax assets will not be realized. It is reasonably possible within the next twelve months that additional valuation allowances may be required on certain foreign deferred tax assets. For more information, see Note 11, Income Taxes, to the accompanying consolidated financial statements.

30





Core Business Evaluation—We are focused on improving our Truck and Parts businesses in our Core markets. We are working to fix, divest or close under-performing and non-strategic areas and expect to realize incremental benefits from these actions in the near future. In addition, we are restructuring our business and rationalizing our Manufacturing operations in an effort to optimize our cost structure. This effort is ongoing and may lead to additional divestitures of businesses or discontinuing programs that are outside of our Core operations or are not performing to our expectations.
As a result of these evaluations, we ceased engine production at our Melrose Park Facility in 2018. We completed the sale of our railcar business in Cherokee, Alabama in February 2018. In May 2017, we completed the sale of a business line included in our Parts segment. During August 2017, we also sold our fabrication business in Conway, Arkansas.
North and Latin American Economy—The outlook for the economies in both the U.S. and Canada remain cautiously optimistic with moderate growth expectations. A tight labor market, strong consumer confidence, and solid manufacturing activities continue to support the U.S. economy to remain above a long-run trend pace. However, rising inflation, tightening monetary policy, and slowing emerging market activities present risks to the economic expansion.  Growth in Latin America is projected to accelerate moderately, largely reflecting the growth in commodity exporters, including Brazil, Chile, Colombia, and Peru. However, the growth trend continues to be challenged by country-specific factors. The new United States, Mexico, and Canada trade agreement will reinforce the stability of Mexico’s economy with a modest expansion in 2019.
Impact of Government Regulation—As a manufacturer of trucks and engines, we continue to face significant governmental regulation of our products, especially in the areas of environmental and safety matters. We are also subject to various noise standards imposed by federal, state, and local regulations. Our facilities may be subject to regulation related to climate change, and climate change itself may also have some impact on our operations. However, these impacts are currently uncertain and we cannot predict the nature and scope of those impacts. For more information, see Impact of Government Regulation in Part I, Item I, Business.

31





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 year ended October 31, 2018 as compared to the year ended October 31, 2017.
(in millions, except per share data and % change)
2018

2017
 
Change
 
% Change
Sales and revenues, net
$
10,250

 
$
8,570

 
$
1,680

 
20
 %
Costs of products sold
8,317

 
7,037

 
1,280

 
18
 %
Restructuring charges
(1
)
 
3

 
(4
)
 
(133
)%
Asset impairment charges
14

 
13

 
1

 
8
 %
Selling, general and administrative expenses
922

 
878

 
44

 
5
 %
Engineering and product development costs
297

 
251

 
46

 
18
 %
Interest expense
327

 
351

 
(24
)
 
(7
)%
Other income, net
(46
)
 
(21
)
 
(25
)
 
119
 %
Total costs and expenses
9,830

 
8,512

 
1,318

 
15
 %
Equity in income of non-consolidated affiliates

 
6

 
(6
)
 
(100
)%
Income from continuing operations before income taxes
420

 
64

 
356

 
556
 %
Income tax expense
(52
)
 
(10
)
 
(42
)
 
420
 %
Income from continuing operations
368

 
54

 
314

 
581
 %
Less: Net income attributable to non-controlling interests
28

 
25

 
3

 
12
 %
Income from continuing operations(A)
340

 
29

 
311

 
N.M.

Income from discontinued operations, net of tax

 
1

 
(1
)
 
(100
)%
Net income (A)
$
340

 
$
30

 
$
310

 
N.M.

 
 
 
 
 
 
 
 
Diluted earnings per share:(A)
 
 
 
 
 
 
 
Continuing operations
$
3.41

 
$
0.31

 
$
3.10

 
N.M.

Discontinued operations

 
0.01

 
(0.01
)
 
(100
)%
 
$
3.41

 
$
0.32

 
$
3.09

 
966
 %
Diluted weighted average shares outstanding
99.6

 
93.5

 
6.1

 
7
 %
_________________________
N.M.
Not meaningful.
(A)
Amounts attributable to NIC.
Sales and revenues, net
Our sales and revenues, net, are principally generated via sales of products and services. Sales and revenues, net in our Consolidated Statements of Operations, by reporting segment were as follows:
(in millions, except % change)
2018
 
2017
 
Change
 
% Change
Truck
$
7,490

 
$
5,809

 
$
1,681

 
29
%
Parts
2,407

 
2,392

 
15

 
1
%
Global Operations
360

 
309

 
51

 
17
%
Financial Services
257

 
235

 
22

 
9
%
Corporate and Eliminations
(264
)
 
(175
)
 
(89
)
 
51
%
Total
$
10,250

 
$
8,570

 
$
1,680

 
20
%
In 2018, our Truck segment net sales increased by $1,681 million, or 29%, primarily due to higher volumes in our Core markets, an increase in defense sales, higher used truck sales, and a shift in model mix, partially offset by a decline in Mexico truck volumes and lower sales due to the exit of our railcar business in Cherokee, Alabama. Chargeouts from our Core markets were up 29%, which is reflective of an improvement in our Class 8 truck volumes and market share.

32





In 2018, our Parts segment net sales increased by $15 million, or 1%, primarily due to pricing, higher Mexico and export volumes and parts sales related to the Fleetrite™ brand, partially offset by lower U.S. and Canada volumes and BDP sales.
In 2018, our Global Operations segment net sales increased by $51 million, or 17%, primarily driven by higher engine volumes in our South America engine operations due to the improving Brazilian economy, partially offset by the depreciation of the Brazilian real against the U.S. dollar as the average conversion rate weakened by 10% compared with the prior year.
In 2018, our Financial Services segment net revenues increased by $22 million or 9%. The increase is primarily driven by higher revenues from operating leases and higher average portfolio balances in the U.S. and Mexico.
Costs of products sold
In 2018, Costs of products sold increased by $1,280 million, primarily driven by the impact of higher volumes in our Core markets.
In 2018, we recorded charges to our used truck reserve of $50 million compared to $111 million in 2017. During 2017, we implemented a shift in market mix to include an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and to lower domestic pricing to enable higher sales velocity. We have decreased our gross used truck inventory balances and inventory reserves as a result of the shift in market mix and change in pricing strategy.
In 2018, we recognized a benefit for adjustments to pre-existing warranties of $9 million compared to $1 million in 2017. We have a benefit primarily due to the decrease in claim frequency across both the Medium Duty and Big Bore engine families in our Truck segment. The impact decreased the reserve for our standard warranty obligations as well as the loss positions related to our Big Bore extended service contracts.
For more information on our estimated warranty obligations and our used truck reserves, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Restructuring Charges
We recognized a restructuring benefit of $1 million in 2018, compared to a charge of $3 million in 2017. During 2017, we recorded postretirement net benefits of $36 million related to the execution of the closure agreement and wind-up charges for our Chatham, Ontario plant, partially offset by postretirement and severance charges of $31 million related to our plan to cease production at our Melrose Park Facility, among other items. For more information, see Note 2, Restructuring and Impairments, to the accompanying consolidated financial statements.
Selling, general and administrative expenses
In 2018, our SG&A expenses increased by $44 million compared to 2017 primarily due to employee compensation expenses, expenses related to growth initiatives, and profit sharing accruals related to supplemental benefits for certain retirees, partially offset by the impact of charges related to the MaxxForce engine EGR product litigation recorded during 2017. For more information on our legal proceedings, see Note 13, Commitments and Contingencies, to the accompanying consolidated financial statements.
Engineering and product development costs
In 2018, our Engineering and product development costs increased by $46 million compared to 2017 primarily due to our development agreements with TRATON Group involving the expense of certain engine and transmission development costs and higher research and product development costs to meet future emission standard regulatory requirements.
Interest expense
In 2018, our Interest expense decreased by $24 million compared to the prior year primarily driven by lower effective interest rates related to our issuance of the 6.625% Senior Notes and the Term Loan Credit Agreement in November 2017, which refinanced our 8.25% Senior Notes and Term Loan, partially offset by the impact of higher average borrowing levels for finance receivables funding.
Other income, net
We recognized Other income of $46 million in 2018, compared to $21 million in the prior year. The increase was primarily driven by a settlement of a business economic loss claim related to our Alabama engine manufacturing facility, for which we recorded a gain of $70 million representing the net present value from the Deepwater Horizon Settlement Program. This increase was partially offset by $46 million of charges related to the extinguishment of unamortized debt issuance costs and tender premium payments associated with the repurchase of our 8.25% Senior Notes and refinancing of our previous Term Loan with the Term Loan Credit Agreement. For more information on the business economic loss settlement, see Note 13, Commitments and Contingencies, to the accompanying consolidated financial statements.

33





Income tax expense
In 2018, we recognized income tax expense from continuing operations of $52 million, compared to $10 million in the prior year. The increase in income tax expense is primarily driven by a $28 million intraperiod allocation benefit in domestic continuing operations due to certain post retirement plan remeasurement gains and a release of various state uncertain tax position liabilities of $14 million, both recorded in 2017.
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 2018, 2017, and 2016 relates to Ford's non-controlling interest in BDP.
Segment Results of Continuing Operations for 2018 as Compared to 2017
We operate in four reporting segments: Truck, Parts, Global Operations, and Financial Services.
We define segment profit (loss) as net income (loss) from continuing operations attributable to NIC 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 14, Segment Reporting, to the accompanying consolidated financial statements.
Truck Segment
(in millions, except % change)
2018
 
2017
 
Change
 
% Change
Truck segment sales, net
$
7,490

 
$
5,809

 
$
1,681

 
29
%
Truck segment profit (loss)
397

 
(6
)
 
403

 
N.M.

_________________________
N.M.
Not meaningful.
Segment sales
In 2018, our Truck segment net sales increased by $1,681 million, or 29%, primarily due to higher volumes in our Core markets, an increase in defense sales, higher used truck sales, and a shift in model mix, partially offset by a decline in Mexico truck volumes and lower sales due to the exit of our railcar business in Cherokee, Alabama. Chargeouts from our Core markets were up 29%, which is reflective of an improvement in our Class 8 truck volumes and market share. The improvement represents a 65% increase in Class 8 heavy trucks, a 16% increase in Class 8 severe service trucks, a 16% increase in Class 6 and 7 medium trucks and an 8% increase in buses.
Segment results
In 2018, our Truck segment results improved by $403 million, The improvement is primarily driven by the impact of higher volumes in our Core markets, higher other income, an increase in our defense sales margins, a decline in used truck losses, and a $26 million benefit related to a request for an equitable adjustment claim in our defense business.
In 2018, we recorded charges in our Truck segment for our used truck reserve of $50 million compared to charges of $111 million in the prior year period. During the second quarter of 2017, we implemented a shift in market mix for our used trucks to include an increase in volume to certain export markets, which had a lower price point as compared to sales through our domestic channels, and to lower domestic pricing to enable higher sales velocity of our used trucks.
In 2018, we recorded a benefit of $9 million in our Truck segment for adjustments to pre-existing warranties compared to charges of $8 million in the prior year. We have a benefit in the current year primarily due to the decrease in claim frequency across both the Medium Duty and Big Bore engine families. The impact decreased the reserve for our standard warranty obligations as well as the loss positions related to our Big Bore extended service contracts.
In 2018, we also recorded a $70 million gain related to the settlement of a business economic loss claim which was recognized in Other income, net in our Consolidated Statements of Operations.

34





Parts Segment
(in millions, except % change)
2018
 
2017
 
Change
 
% Change
Parts segment sales, net
$
2,407

 
$
2,392

 
$
15

 
1
 %
Parts segment profit
569

 
616

 
(47
)
 
(8
)%
Segment sales
In 2018, our Parts segment net sales increased by $15 million, or 1%, primarily due to pricing, higher Mexico and export volumes and parts sales related to the Fleetrite™ brand, partially offset by lower U.S. and Canada volumes and BDP sales.
Segment profit
In 2018, our Parts segment profit decreased by $47 million, or 8%, primarily due to lower U.S. margins, and higher freight-related expenses and intercompany access fees. Access fees are allocated to the Parts segment from the Truck segment, primarily for development of new products, and consist of certain engineering and product development costs, depreciation expense, and SG&A costs.
Global Operations Segment
(in millions, except % change)
2018

2017
 
Change
 
% Change
Global Operations segment sales, net
$
360

 
$
309

 
$
51

 
17
%
Global Operations segment profit (loss)
2

 
(7
)
 
9

 
129
%
Segment sales
In 2018, our Global Operations segment net sales increased by $51 million, or 17%, primarily driven by higher engine volumes in our South America engine operations due to the improving Brazilian economy, partially offset by the depreciation of the Brazilian real against the U.S. dollar as the average conversion rate weakened by 10% compared with the prior year.
Segment results
In 2018, our Global Operations segment results increased by $9 million, or 129%. The improvement was driven by the impact of higher engine volumes and cost-reduction actions initiated in 2017. In 2017, our Global Operations segment results included a $9 million benefit recognized as an adjustment to pre-existing warranties and other income related to the sale of machinery and equipment.
Financial Services Segment
(in millions, except % change)
2018
 
2017
 
Change
 
% Change
Financial Services segment revenues, net
$
257

 
$
235

 
$
22

 
9
%
Financial Services segment profit
88

 
77

 
11

 
14
%
Segment revenues
In 2018, our Financial Services segment net revenues increased by $22 million, or 9%. The increase is primarily driven by higher revenues from operating leases and higher average portfolio balances in the U.S. and Mexico.
Segment profit
In 2018, our Financial Services segment profit increased by $11 million, or 14%. The increase is primarily driven by higher revenues and is partially offset by higher interest expense, an increase in the provision for loan losses in Mexico, and higher depreciation expense on operating leases.

35





Results of Operations for the year ended October 31, 2017 as compared to the year ended October 31, 2016
(in millions, except per share data and % change)
2017
 
2016
 
Change
 
% Change
Sales and revenues, net
$
8,570

 
$
8,111

 
$
459

 
6
 %
Costs of products sold
7,037

 
6,812

 
225

 
3
 %
Restructuring charges
3

 
10

 
(7
)
 
(70
)%
Asset impairment charges
13

 
27

 
(14
)
 
(52
)%
Selling, general and administrative expenses
878

 
802

 
76

 
9
 %
Engineering and product development costs
251

 
247

 
4

 
2
 %
Interest expense
351

 
327

 
24

 
7
 %
Other income, net
(21
)
 
(76
)
 
55

 
(72
)%
Total costs and expenses
8,512

 
8,149

 
363

 
4
 %
Equity in income of non-consolidated affiliates
6

 
6

 

 
 %
Income (loss) from continuing operations before income taxes
64

 
(32
)
 
96

 
(300
)%
Income tax expense
(10
)
 
(33
)
 
23

 
(70
)%
Income (loss) from continuing operations
54

 
(65
)
 
119

 
(183
)%
Less: Net income attributable to non-controlling interests
25

 
32

 
(7
)
 
(22
)%
Income (loss) from continuing operations(A)
29

 
(97
)
 
126

 
(130
)%
Income from discontinued operations, net of tax
1

 

 
1

 
N.M.

Net income (loss)(A)
$
30

 
$
(97
)
 
$
127

 
(131
)%
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:(A)
 
 
 
 
 
 
 
Continuing operations
$
0.31

 
$
(1.19
)
 
$
1.50

 
(126
)%
Discontinued operations
0.01

 

 
0.01

 
N.M.

 
$
0.32

 
$
(1.19
)
 
$
1.51

 
(127
)%
Diluted weighted average shares outstanding
93.5

 
81.7

 
11.8

 
14
 %
_________________________
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:
(in millions, except % change)
2017
 
2016
 
Change
 
% Change
Truck
$
5,809

 
$
5,403

 
$
406

 
8
 %
Parts
2,392

 
2,427

 
(35
)
 
(1
)%
Global Operations
309

 
341

 
(32
)
 
(9
)%
Financial Services
235

 
235

 

 
 %
Corporate and Eliminations
(175
)
 
(295
)
 
120

 
(41
)%
Total
$
8,570

 
$
8,111

 
$
459

 
6
 %
In 2017, our Truck segment net sales increased $406 million, or 8%, primarily due to higher volumes in our Core markets, an increase in Mexico truck volumes, an increase in sales of GM-branded units manufactured for GM, and higher used truck sales. Chargeouts from our Core markets were up 8%, which is reflective of an improvement in our Class 8 volumes and market share.
In 2017, our Parts segment net sales decreased $35 million, or 1%, primarily due to lower BDP sales and lower North America volumes, partially offset by higher U.S. and Canada parts sales related to the Fleetrite™ brand and remanufactured parts sales.

36





In 2017, our Global Operations segment net sales decreased $32 million, or 9%, primarily driven by lower engine and component volumes in our South America engine operations, which declined 31% due to the impact of continued weakness in the Brazilian economy as well as the cessation of sales to an OEM customer in 2016. The decrease in volume was partially offset by the appreciation of the Brazilian real against the U.S. dollar as the average conversion rate strengthened by 11% compared with the prior year period.
In 2017, our Financial Services segment net revenues were comparable to the prior year primarily driven by higher interest
rates and higher revenues from operating leases in Mexico, offset by lower average finance receivable balances and
unfavorable movements in foreign currency exchange rates impacting our Mexican portfolio.
Costs of products sold
In 2017, Costs of products sold increased by $225 million, reflecting the impact of higher volumes in our Core markets, Mexico truck volumes, and market pressures, partially offset by a decrease in used truck losses, improved material costs, and lower adjustments to pre-existing warranties.
In 2017, we recorded charges to our used truck reserve of $111 million compared to $187 million in 2016. During the second quarter of 2017, we implemented a shift in market mix to include an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and lower domestic pricing to enable higher sales velocity. We decreased our gross used truck inventory balances and inventory reserves as a result of the shift in market mix and change in pricing strategy.
In 2017, we recognized a benefit for adjustments to pre-existing warranties of $1 million compared to a charge of $78 million in 2016. The decline in charges is primarily due to the reduction in claim frequency across both the medium duty and big bore engine families in our Truck segment. The impact decreased the reserve for our standard warranty obligations.
For more information on our estimated warranty obligations and our used truck reserves, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Restructuring Charges
We recognized restructuring charges of $3 million in 2017 compared to $10 million in 2016. The decrease is primarily due to postretirement net benefits of $36 million related to the execution of the closure agreement and wind-up charges for our Chatham, Ontario plant, partially offset by postretirement and severance charges of $31 million related to our plan to cease production at our Melrose Park Facility, and certain cost reduction actions impacting our Global Operations segment. For more information, see Note 2, Restructuring and Impairments, to the accompanying consolidated financial statements.
Selling, general and administrative expenses
In 2017, our SG&A expenses increased by $76 million compared to 2016 primarily due to an increase in employee compensation expense and charges related to EGR product litigation. For more information on our legal proceedings, see Note 10, Commitments and Contingencies, to the accompanying consolidated financial statements.
Interest expense
In 2017, our interest expense increased by $24 million compared to 2016 primarily driven by the January 2017 issuance of additional Senior Notes, increased amortization of debt issuance costs, and an increase in average borrowing rates, partially offset by the impact of the lower interest rate related to the February 2017 refinancing of our Term Loan and lower average borrowing levels for finance receivables funding.
Other income, net
We recognized Other income of $21 million in 2017, compared to $76 million in the prior year. The decrease in Other income in 2017 is primarily due to a one-time $15 million fee received from a third party in the first quarter of 2016, deferred income for an IP license of $19 million in the second quarter of 2016, $13 million of IP license income in the third quarter of 2016, and unfavorable movements in foreign currency exchange rates, partially offset by the sale of a business line and machinery and equipment in 2017.
Income tax expense
In 2017, we recognized income tax expense from continuing operations of $10 million, compared to $33 million in the prior year. The decline in income tax expense is primarily driven by a $28 million intraperiod allocation benefit in domestic continuing operations due to certain post retirement plan remeasurement gains and a release of various state uncertain tax position liabilities of $14 million, partially offset by an increase in foreign taxes in Canada and Mexico and the non-recurring benefit of $13 million from the release of the valuation allowance on U.S. AMT credits due to the U.S. enactment of the Protecting Americans from Tax Hikes Act of 2015 recorded in the first quarter of 2016.

37





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 2017 and 2016 relates to Ford's non-controlling interest in BDP.
Segment Results of Continuing Operations for 2017 as Compared to 2016
Truck Segment
(in millions, except % change)
2017
 
2016
 
Change
 
% Change
Truck segment sales, net
$
5,809

 
$
5,403

 
$
406

 
8
%
Truck segment loss
(6
)
 
(189
)
 
183

 
97
%
Segment sales
In 2017, our Truck segment net sales increased by $406 million, or 8%, primarily due to higher volumes in our Core markets, an increase in Mexico truck volumes, an increase in sales of GM-branded units manufactured for GM, and higher used truck sales. Chargeouts from our Core markets were up 8%, which is reflective of an improvement in our Class 8 volumes and market share. The improvement represents a 17% increase in Class 6 and 7 medium trucks, a 3% increase in Class 8 heavy trucks, a 9% increase in Class 8 severe service trucks and a 1% increase in buses.
Segment loss
In 2017, our Truck segment loss decreased by $183 million, or 97%, primarily driven by the impact of higher volumes in our Core markets and Mexico, a decrease in used truck losses, lower adjustments to pre-existing warranties, improved material costs, partially offset by market pressures, charges related to the MaxxForce engine EGR product litigation of $31 million, and a decrease in Other Income.
In 2017, we recorded charges in our Truck segment for our used truck reserve of $111 million compared to charges of $187 million in the respective prior year period. During the second quarter of 2017, we implemented a shift in market mix to include an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and lower domestic pricing to enable higher sales velocity.
In 2017, we recorded charges in our Truck segment for adjustments to pre-existing warranties of $8 million compared to charges of $78 million in the prior year. The decline in charges is primarily due to the reduction in claim frequency across both the Medium Duty and Big Bore engine families in our Truck segment. The impact decreased the reserve for our standard warranty obligations.
Additionally, the decline in Other Income during 2017 is due to a one-time $15 million fee received from a third party in the first quarter of 2016, deferred income for an IP license of $19 million in the second quarter of 2016, $13 million of IP license income in the third quarter of 2016, and an overall decline in the allocable share base of Access Fees from our Parts segment as a result of lower engineering and product development costs in recent years.
Parts Segment
(in millions, except % change)
2017
 
2016
 
Change
 
% Change
Parts segment sales, net
$
2,392

 
$
2,427

 
$
(35
)
 
(1
)%
Parts segment profit
616

 
640

 
(24
)
 
(4
)%
Segment sales
In 2017, our Parts segment net sales decreased by $35 million, or 1%, primarily due to lower BDP sales and lower North America volumes, partially offset by higher U.S. and Canada parts sales related to the Fleetrite™ brand and remanufactured parts sales.
Segment profit
In 2017, our Parts segment profit decreased by $24 million, or 4%, primarily due to margin declines in BDP and in our U.S. market, partially offset by higher other income of $6 million related to the sale of a business line and lower intercompany access fees. Access fees are allocated to the Parts segment from the Truck segment, primarily for development of new products, and consist of certain engineering and product development costs, depreciation expense, and SG&A costs. The decrease in the allocable share of fees in 2017 is due to significant decreases in engineering and product development costs in recent years.

38





Global Operations Segment
(in millions, except % change)
2017
 
2016
 
Change
 
% Change
Global Operations segment sales, net
$
309

 
$
341

 
$
(32
)
 
(9
)%
Global Operations segment loss
(7
)
 
(21
)
 
14

 
67
 %
Segment sales
In 2017, our Global Operations segment net sales decreased by $32 million, or 9%, primarily driven by lower engine and component volumes in our South America engine operations, which declined 31% due to the impact of continued weakness in the Brazilian economy as well as the cessation of sales to an OEM customer in 2016. The decrease in volume was partially offset by the appreciation of the Brazilian real against the U.S. dollar as the average conversion rate strengthened by 11% compared with the prior year period.
Segment loss
In 2017, our Global Operations segment loss decreased by $14 million, or 67%, primarily due to lower manufacturing and SG&A expenses as a result of our prior year cost reduction efforts, a one-time benefit of $9 million recognized as an adjustment to pre-existing warranties and higher other income related to the sale of machinery and equipment. These increases were partially offset by an increase in restructuring charges in Brazil related to cost reduction actions consisting of personnel costs for employee separation and related benefits.
Financial Services Segment
(in millions, except % change)
2017
 
2016
 
Change
 
% Change
Financial Services segment revenues, net
$
235

 
$
235

 
$

 
 %
Financial Services segment profit
77

 
100

 
(23
)
 
(23
)%
Segment revenues
In 2017, our Financial Services segment net revenues were comparable to the prior year primarily driven by higher interest rates and higher revenues from operating leases in Mexico, offset by lower average finance receivable balances and unfavorable movements in foreign currency exchange rates impacting our Mexican portfolio.
Segment profit
In 2017, our Financial Services segment profit decreased by $23 million, or 23%. The decrease is primarily driven by the pay down of certain intercompany loan receivables in the prior year and lower interest margin resulting from an increase in our average borrowing rate.

39





Supplemental Information
The following tables provide additional information on truck industry retail units, market share data, order units, backlog units, and chargeout units. These tables present key metrics and trends that provide quantitative measures of our performance.
Truck Industry Retail Deliveries
The following table summarizes approximate industry retail deliveries for our Core markets, categorized by relevant class, according to Wards Auto and IHS Markit ("Polk") and our Core retail deliveries:
 
For the Years Ended October 31,
 
2018 vs 2017
 
2017 vs 2016
(in units)
2018
 
2017
 
2016
 
Change
 
% Change
 
Change
 
% Change
Core Markets (U.S. and Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
School buses(A)
33,100

 
35,100

 
32,800

 
(2,000
)
 
(6
)%
 
2,300

 
7
 %
Class 6 and 7 medium trucks
98,800

 
86,100

 
86,800

 
12,700

 
15
 %
 
(700
)
 
(1
)%
Class 8 heavy trucks
206,400

 
146,200

 
165,700

 
60,200

 
41
 %
 
(19,500
)
 
(12
)%
Class 8 severe service trucks(B)
70,300

 
60,600

 
61,100

 
9,700

 
16
 %
 
(500
)
 
(1
)%
Total Core Markets(B)
408,600

 
328,000

 
346,400

 
80,600

 
25
 %
 
(18,400
)
 
(5
)%
Combined class 8 trucks(B)
276,700

 
206,800

 
226,800

 
69,900

 
34
 %
 
(20,000
)
 
(9
)%
Navistar Core retail deliveries
71,400

 
56,700

 
54,700

 
14,700

 
26
 %
 
2,000

 
4
 %
_________________________
(A)
The School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag.
(B)
Retail deliveries include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.
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 Auto and Polk:
 
For the Years Ended October 31,
 
2018
 
2017
 
2016
Core Markets (U.S. and Canada)
 
 
 
 
 
School buses(A) 
33
%
 
32
%
 
34
%
Class 6 and 7 medium trucks
23
%
 
25
%
 
21
%
Class 8 heavy trucks
14
%
 
11
%
 
10
%
Class 8 severe service trucks(B)
13
%
 
13
%
 
13
%
Total Core Markets(B)
17
%
 
17
%
 
16
%
Combined class 8 trucks(B)
14
%
 
12
%
 
11
%
_______________________
(A)
The School bus retail delivery market share includes buses classified as B, C, and D and are being reported on a one-month lag.
(B)
Retail delivery market share includes CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.

40





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 and buses. 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 Core units:
 
For the Years Ended October 31,
 
2018 vs 2017
 
2017 vs 2016
(in units)
2018

2017
 
2016
 
Change
 
% Change
 
Change
 
% Change
Core Markets (U.S. and Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
School buses
12,800

 
11,000

 
11,900

 
1,800

 
16
%
 
(900
)
 
(8
)%
Class 6 and 7 medium trucks
34,700

 
21,200

 
16,900

 
13,500

 
64
%
 
4,300

 
25
 %
Class 8 heavy trucks
42,400

 
18,900

 
6,300

 
23,500

 
124
%
 
12,600

 
200
 %
Class 8 severe service trucks(A)
15,000

 
8,800

 
7,700

 
6,200

 
70
%
 
1,100

 
14
 %
Total Core Markets(A)
104,900

 
59,900

 
42,800

 
45,000

 
75
%
 
17,100

 
40
 %
Combined class 8 trucks(A)
57,400

 
27,700

 
14,000

 
29,700

 
107
%
 
13,700

 
98
 %
_______________________
(A)
Orders include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.
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 backlogs are 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 Core units:
 
For the Years Ended October 31,
 
2018 vs 2017
 
2017 vs 2016
(in units)
2018
 
2017
 
2016
 
Change
 
% Change
 
Change
 
% Change
Core Markets (U.S. and Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
School buses
2,400

 
1,700

 
2,100

 
700

 
41
%
 
(400
)
 
(19
)%
Class 6 and 7 medium trucks
14,500

 
4,600

 
4,100

 
9,900

 
215
%
 
500

 
12
 %
Class 8 heavy trucks
20,800

 
6,800

 
4,700

 
14,000

 
206
%
 
2,100

 
45
 %
Class 8 severe service trucks(A)
7,700

 
2,500

 
2,100

 
5,200

 
208
%
 
400

 
19
 %
Total Core Markets(A)
45,400

 
15,600

 
13,000

 
29,800

 
191
%
 
2,600

 
20
 %
Combined class 8 trucks(A)
28,500

 
9,300

 
6,800

 
19,200

 
206
%
 
2,500

 
37
 %
_______________________
(A)
Backlogs include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.

41





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:
 
For the Years Ended October 31,
 
2018 vs 2017
 
2017 vs 2016
(in units)
2018

2017
 
2016
 
Change
 
% Change
 
Change
 
% Change
Core Markets (U.S. and Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
School buses(A)
12,200

 
11,300

 
11,200

 
900

 
8
 %
 
100

 
1
%
Class 6 and 7 medium trucks
24,300

 
20,900

 
17,800

 
3,400

 
16
 %
 
3,100

 
17
%
Class 8 heavy trucks
27,800

 
16,800

 
16,300

 
11,000

 
65
 %
 
500

 
3
%
Class 8 severe service trucks(B)
9,600

 
8,300

 
7,600

 
1,300

 
16
 %
 
700

 
9
%
Total Core Markets
73,900

 
57,300

 
52,900

 
16,600

 
29
 %
 
4,400

 
8
%
Non "Core" defense
700

 
800

 
500

 
(100
)
 
(13
)%
 
300

 
60
%
Other markets(C)
9,600

 
10,800

 
9,900

 
(1,200
)
 
(11
)%
 
900

 
9
%
Total worldwide units
84,200

 
68,900

 
63,300

 
15,300

 
22
 %
 
5,600

 
9
%
Combined class 8 trucks
37,400

 
25,100

 
23,900

 
12,300

 
49
 %
 
1,200

 
5
%
_____________________________
(A)
The School bus chargeouts include buses classified as B, C, and D and are being reported on a one-month lag.
(B)
Chargeouts include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.
(C)
Other markets primarily consist of Export Truck and Mexico.
Liquidity and Capital Resources
Consolidated cash, cash equivalents, and marketable securities
 
As of October 31,
(in millions)
2018

2017

2016
Consolidated cash and cash equivalents
$
1,320

 
$
706

 
$
804

Consolidated marketable securities
101

 
370

 
46

Consolidated cash, cash equivalents, and marketable securities
$
1,421

 
$
1,076

 
$
850

 
As of October 31,
(in millions)
2018
 
2017
 
2016
Manufacturing operations
$
1,362

 
$
1,036

 
$
800

Financial Services operations
59

 
40

 
50

Consolidated cash, cash equivalents, and marketable securities
$
1,421

 
$
1,076

 
$
850

Manufacturing cash, cash equivalents, and marketable securities
Manufacturing cash, cash equivalents, and marketable securities, and Financial Services cash, cash equivalents and marketable securities are not presented in accordance with, and should not be viewed as an alternative to, 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 GAAP. However, we believe that non-GAAP reporting provides meaningful information and therefore we use it to supplement our GAAP reporting by identifying items that may not be related to the Core manufacturing business. We provide this information for an additional analysis of our ability to meet our operating requirements, capital expenditures, equity investments, and financial obligations. Manufacturing cash, cash equivalents, and marketable securities represent our consolidated cash, cash equivalents, and marketable securities, which excludes cash, cash equivalents, and marketable securities of our Financial Services operations. We include marketable securities with our cash and cash equivalents when assessing our liquidity position as our investments are highly liquid in nature.
Consolidated cash, cash equivalents, and marketable securities totaled $1.4 billion at October 31, 2018, which includes an immaterial amount of cash and cash equivalents primarily attributable to BDP that is generally not available to satisfy our obligations. For additional information on the consolidation of BDP, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.

42





Cash Requirements
We generate cash flows for operations from the sale of trucks, buses, diesel engines, and parts, as well as from product financing provided to our dealers and retail customers by our Financial Services operations. We fund our operations and strategic plans primarily with cash, cash generated from operations, debt and equity. It is our opinion that, in the absence of significant extraordinary cash demands, our: (i) level of cash, cash equivalents, and marketable securities, (ii) current and forecasted cash flow from our Manufacturing operations and Financial Services operations, (iii) availability under various funding facilities, (iv) current and forecasted availability from various funding alliances, and (v) access to capital in the capital markets, will provide sufficient funds to meet operating requirements, capital expenditures, investments, and financial obligations on both a short-term and long-term basis. Future Manufacturing operations debt obligations are expected to be met through a combination of cash generation from operations and refinancing activities. We also believe the quality of our underlying portfolio of receivables will ensure the ongoing funding from various sources and alliance partners and will permit our Financial Services operations to meet our financing requirements and those of our dealers, and retail customers.
We have capacity under our various debt arrangements to raise additional cash by incurring incremental debt. The covenants in all of our debt agreements permit us to refinance existing debt instruments as they mature. Our 4.75% Senior Secured Convertible Notes mature in April 2019, at which time we expect to either repay from cash-on-hand and/or refinance with long term debt.
Our Manufacturing operations sold $8.5 billion, $7.4 billion and $7.2 billion of wholesale notes and accounts receivable to our Financial Services operations during the years ended October 31, 2018, 2017 and 2016, respectively. The total outstanding balance of wholesale notes and accounts receivable purchased was $1.7 billion and $1.4 billion as of October 31, 2018 and 2017, respectively. Total loans outstanding from our Financial Services operations to our Manufacturing operations were $212 million and $91 million as of October 31, 2018 and 2017, respectively.
Included in loans made from Financial Services operations to Manufacturing operations is a new $150 million loan made during the year ended October 31, 2018 in which NFC loaned certain proceeds from its successful $400 million Term Loan B financing. Also included in loans made from Financial Services operations to Manufacturing operations is an intercompany financing from NFC that is secured by a first priority lien on used truck inventory, and certain related assets (the "Intercompany Used Truck Loan"). As of October 31, 2018 and October 31, 2017, our borrowings under the Intercompany Used Truck Loan were zero and $29 million, respectively. Our Manufacturing operations also have an intercompany revolving loan agreement (the "Intercompany Revolving Loan") with our captive insurance company under our Financial Services segment. During the year ended October 31, 2018, our borrowings under the Intercompany Revolving Loan agreement remained at $7 million.
Our Financial Services operations in Mexico extend working capital loans to our Manufacturing operations in Mexico for orders received. As of October 31, 2018 and October 31, 2017, the borrowings of our Manufacturing operations in Mexico under these loan agreements were $55 million, for both periods.
See Note 9, Debt, to the accompanying consolidated financial statements for a description of our credit facilities and long-term debt obligations.
Cash Flow Overview