Company Quick10K Filing
Quick10K
Navistar
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$33.91 99 $3,360
10-Q 2019-01-31 Quarter: 2019-01-31
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
10-K 2015-10-31 Annual: 2015-10-31
10-Q 2015-07-31 Quarter: 2015-07-31
10-Q 2015-04-30 Quarter: 2015-04-30
10-Q 2015-01-31 Quarter: 2015-01-31
10-K 2014-10-31 Annual: 2014-10-31
10-Q 2014-07-31 Quarter: 2014-07-31
10-Q 2014-04-30 Quarter: 2014-04-30
10-Q 2014-01-31 Quarter: 2014-01-31
8-K 2019-04-15 Enter Agreement, Exhibits
8-K 2019-03-08 Regulation FD, Exhibits
8-K 2019-02-25 Regulation FD, Exhibits
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 Earnings, Regulation FD, Exhibits
8-K 2018-12-18 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
C Citigroup 162,220
RDY Dr Reddys Laboratories 6,630
ATU Actuant 1,570
SPWR Sunpower 1,080
BRY Berry Petroleum 1,030
APTX Aptinyx 129
DRIO Dariohealth 27
NURO Neurometrix 8
ALKM Alkame Holdings 0
PKPL Park Place Energy 0
NAV 2019-01-31
Part I-Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10 navex101312019.htm
EX-31.1 navex3111312019.htm
EX-31.2 navex3121312019.htm
EX-32.1 navex3211312019.htm
EX-32.2 navex3221312019.htm
EX-99.1 navex9911312019.htm

Navistar Earnings 2019-01-31

NAV 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 nav10q2019q1.htm 10-Q Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-Q
___________________________________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2019

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.        
   Commission file number 1-9618
___________________________________________________

  navistar_logoa04a01a01a02a13.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
______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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.
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 February 28, 2019, the number of shares outstanding of the registrant’s common stock was 99,065,477, net of treasury shares.
 
 
 
 
 



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






2






Disclosure Regarding Forward-Looking Statements
Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of 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 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;
our expectations relating to litigation costs and similar matters;
estimates relating to pension plan contributions and unfunded pension and postretirement benefits;
our expectations relating to commodity price risk, including the impact of tariff increases or potential new tariffs; and
anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations.

3





These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our results of operations and could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to differences in our future financial results include those discussed in Item 1A, Risk Factors, included within our Annual Report on Form 10-K for the fiscal year ended October 31, 2018 which was filed on December 18, 2018, as well as those factors discussed elsewhere in this report. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.
Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as a result, are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the United States ("U.S.") Securities and Exchange Commission ("SEC"). We make these filings available free of charge on our website (http://www.navistar.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC.


4





PART I—Financial Information
Item 1.
Financial Statements
Navistar International Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended January 31,
(in millions, except per share data)
2019
 
2018
Sales and revenues
 
 
 
Sales of manufactured products, net
$
2,386

 
$
1,867

Finance revenues
47

 
38

Sales and revenues, net
2,433

 
1,905

Costs and expenses
 
 
 
Costs of products sold
1,979

 
1,532

Restructuring charges

 
(3
)
Asset impairment charges
2

 
2

Selling, general and administrative expenses
186

 
191

Engineering and product development costs
86

 
75

Interest expense
85

 
79

Other expense, net
97

 
80

Total costs and expenses
2,435

 
1,956

Equity in income of non-consolidated affiliates

 

Loss before income tax
(2
)
 
(51
)
Income tax benefit (expense)
19

 
(15
)
Net income (loss)
17

 
(66
)
Less: Net income attributable to non-controlling interests
6

 
7

Net Income (loss) attributable to Navistar International Corporation
$
11

 
$
(73
)
 
 
 
 
Income (loss) per share attributable to Navistar International Corporation:
 
 
 
Basic
$
0.11

 
$
(0.74
)
Diluted
0.11

 
(0.74
)
 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
99.1

 
98.6

Diluted
99.4

 
98.6


See Notes to Consolidated Financial Statements
5



Navistar International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) 
(in millions)
Three Months Ended January 31,
2019

2018
Net income (loss)
$
17

 
$
(66
)
Other comprehensive income:
 
 
 
Foreign currency translation adjustment
14

 
22

Defined benefit plans, net of tax
115

 
35

Total other comprehensive income
129

 
57

Comprehensive income (loss)
146

 
(9
)
Less: Net income attributable to non-controlling interests
6

 
7

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

 
$
(16
)

See Notes to Consolidated Financial Statements
6



Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
 
January 31,
2019
 
October 31,
2018
(in millions, except per share data)
 
 
 
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,201

 
$
1,320

Restricted cash and cash equivalents
83

 
62

Marketable securities
41

 
101

Trade and other receivables, net
429

 
456

Finance receivables, net
1,818

 
1,898

Inventories, net
1,211

 
1,110

Other current assets
291

 
189

Total current assets
5,074

 
5,136

Restricted cash
65

 
63

Trade and other receivables, net
31

 
49

Finance receivables, net
272

 
260

Investments in non-consolidated affiliates
32

 
50

Property and equipment (net of accumulated depreciation and amortization of $2,452 and $2,498, respectively)
1,275

 
1,370

Goodwill
38

 
38

Intangible assets (net of accumulated amortization of $141 and $140, respectively)
29

 
30

Deferred taxes, net
123

 
121

Other noncurrent assets
98

 
113

Total assets
$
7,037

 
$
7,230

LIABILITIES and STOCKHOLDERS’ DEFICIT
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
942

 
$
946

Accounts payable
1,484

 
1,606

Other current liabilities
1,225

 
1,255

Total current liabilities
3,651

 
3,807

Long-term debt
4,552

 
4,521

Postretirement benefits liabilities
1,961

 
2,097

Other noncurrent liabilities
686

 
731

Total liabilities
10,850

 
11,156

Stockholders’ deficit
 
 
 
Series D convertible junior preference stock
2

 
2

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

 
10

Additional paid-in capital
2,732

 
2,731

Accumulated deficit
(4,609
)
 
(4,593
)
Accumulated other comprehensive loss
(1,791
)
 
(1,920
)
Common stock held in treasury, at cost (4.1 and 4.2 shares, respectively)
(160
)
 
(161
)
Total stockholders’ deficit attributable to Navistar International Corporation
(3,816
)
 
(3,931
)
Stockholders’ equity attributable to non-controlling interests
3

 
5

Total stockholders’ deficit
(3,813
)
 
(3,926
)
Total liabilities and stockholders’ deficit
$
7,037

 
$
7,230


See Notes to Consolidated Financial Statements
7



Navistar International Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended January 31,
(in millions)
2019
 
2018
Cash flows from operating activities
 
 
 
Net income (loss)
$
17

 
$
(66
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation and amortization
33

 
37

Depreciation of equipment leased to others
15

 
18

Deferred taxes, including change in valuation allowance
(41
)
 
6

Asset impairment charges
2

 
2

Gain on sales of investments and businesses, net
(59
)
 

Amortization of debt issuance costs and discount
6

 
8

Stock-based compensation

 
9

Provision for doubtful accounts
1

 
1

Equity in income of non-consolidated affiliates, net of dividends

 
3

Write-off of debt issuance costs and discount

 
42

Other non-cash operating activities
(1
)
 
(6
)
Changes in other assets and liabilities, exclusive of the effects of businesses disposed
(213
)
 
(130
)
Net cash used in operating activities
(240
)
 
(76
)
Cash flows from investing activities
 
 
 
Purchases of marketable securities

 
(61
)
Sales of marketable securities

 
150

Maturities of marketable securities
61

 
5

Capital expenditures
(44
)
 
(30
)
Purchases of equipment leased to others
(42
)
 
(52
)
Proceeds from sales of property and equipment
3

 
3

Proceeds from sales of affiliates
95

 

Other investing activities
1

 

Net cash provided by investing activities
74

 
15

Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt

 
16

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

 
(150
)
Proceeds from issuance of non-securitized debt
27

 
2,747

Principal payments on non-securitized debt
(61
)
 
(2,521
)
Net change in notes and debt outstanding under revolving credit facilities
83

 
(38
)
Debt issuance costs
(1
)
 
(33
)
Proceeds from financed lease obligations
6

 
16

Proceeds from exercise of stock options
1

 
4

Dividends paid by subsidiaries to non-controlling interest
(8
)
 
(7
)
Other financing activities

 
(12
)
Net cash provided by financing activities
73

 
6

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(3
)
 
2

Decrease in cash, cash equivalents and restricted cash
(96
)
 
(53
)
Cash, cash equivalents and restricted cash at beginning of the period
1,445

 
840

Cash, cash equivalents and restricted cash at end of the period
$
1,349

 
$
787


See Notes to Consolidated Financial Statements
8



Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit
(Unaudited)
(in millions)
Series D
Convertible
Junior
Preference
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Common
Stock
Held in
Treasury,
at cost
 
Stockholders'
Equity
Attributable
to Non-controlling
Interests
 
Total
Balance as of October 31, 2018
$
2

 
$
10

 
$
2,731

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

 
$
(3,926
)
Net income

 

 

 
11

 

 

 
6

 
17

Total other comprehensive income

 

 

 

 
129

 

 

 
129

ASC-606 modified retrospective adoption

 

 

 
(27
)
 

 

 

 
(27
)
Stock-based compensation

 

 
2

 

 

 

 

 
2

Stock ownership programs

 

 
(1
)
 

 

 
1

 

 

Cash dividends paid to non-controlling interest

 

 

 

 

 

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

 
$
10

 
$
2,732

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

 
$
(3,813
)
Balance as of October 31, 2017
$
2

 
$
10

 
$
2,733

 
$
(4,933
)
 
$
(2,211
)
 
$
(179
)
 
$
4

 
$
(4,574
)
Net income (loss)

 

 

 
(73
)
 

 

 
7

 
(66
)
Total other comprehensive income

 

 

 

 
57

 

 

 
57

Stock-based compensation

 

 
3

 

 

 

 

 
3

Stock ownership programs

 

 
(1
)
 

 

 
5

 

 
4

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(7
)
 
(7
)
Balance as of January 31, 2018
$
2

 
$
10

 
$
2,735

 
$
(5,006
)
 
$
(2,154
)
 
$
(174
)
 
$
4

 
$
(4,583
)


See Notes to Consolidated Financial Statements
9



Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Organization and Description of the Business
Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating entities are Navistar, Inc. ("NI") and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer collectively to NIC and its consolidated subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Parts, Global Operations (collectively called "Manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively called "Financial Services operations"). These segments are discussed in Note 12, Segment Reporting.
Our fiscal year ends on October 31. As such, all references to 2019, 2018, and other years contained within this Quarterly Report on Form 10-Q relate to the fiscal year, unless otherwise indicated.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our Manufacturing operations and our Financial Services operations, including VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts.
We prepared the accompanying unaudited consolidated financial statements in accordance with United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for comprehensive annual financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended October 31, 2018, which should be read in conjunction with the disclosures therein. In our opinion, these interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.
Variable Interest Entities
We have an interest in several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our VIEs that we are the primary beneficiary because we have the power to direct the activities of the VIE that most significantly impact its economic performance and we have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. Accordingly, we include in our consolidated financial statements the assets and liabilities and results of operations of those entities, even though we may not own a majority voting interest. The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather they represent claims against the specific assets of these VIEs. Assets of these entities are not readily available to satisfy claims against our general assets.
We are the primary beneficiary of our Blue Diamond Parts, LLC ("BDP") joint venture with Ford Motor Company ("Ford"). As a result, our Consolidated Balance Sheets include assets of $26 million and $39 million and liabilities of $3 million and $4 million as of January 31, 2019 and October 31, 2018, respectively, including $4 million of cash and cash equivalents, at both dates, which are not readily available to satisfy claims against our general assets. The creditors of BDP do not have recourse to our general credit.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets of $1.0 billion and $994 million as of January 31, 2019 and October 31, 2018, respectively, and liabilities of $902 million and $852 million as of January 31, 2019 and October 31, 2018, respectively, all of which are involved in securitizations that are treated as asset-backed debt. In addition, our Consolidated Balance Sheets include secured assets of $359 million and $370 million as of January 31, 2019 and October 31, 2018, respectively, and corresponding liabilities of $181 million and $205 million, at the respective dates, which are related to other secured transactions that do not qualify for sale accounting treatment, and, therefore, are treated as borrowings secured by operating and finance leases. Investors that hold securitization debt have a priority claim on the cash flows generated by their respective securitized assets to the extent that the related VIEs are required to make principal and interest payments. Investors in securitizations of these entities have no recourse to our general credit.

10




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



We also have an interest in other VIEs, which we do not consolidate because we are not the primary beneficiary. Our financial support and maximum loss exposure relating to these non-consolidated VIEs are not material to our financial condition, results of operations, or cash flows.
We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability to exercise significant influence over operating and financial policies. Equity in income of non-consolidated affiliates includes our share of the net income of these entities.
Related Party Transactions
We have a series of commercial relationships and agreements with TRATON AG and certain of its subsidiaries and affiliates ("TRATON Group") for royalties related to use of certain engine technology, contract manufacturing operations performed by us, the sale of engines, the sale and purchase of parts, and a procurement joint venture. We have also entered into development agreements with TRATON Group involving certain engine and transmission projects. This development work is being expensed as incurred. For the three months ended January 31, 2019 and 2018, revenue recognized was approximately $29 million and $40 million, respectively. For the three months ended January 31, 2019 and 2018, expenses incurred were $13 million and $11 million, respectively, included primarily in Engineering and product development costs on our Consolidated Statements of Operations. Our receivable from TRATON Group was $16 million and $10 million as of January 31, 2019 and October 31, 2018, respectively. Our payable to TRATON Group was $37 million and $25 million as of January 31, 2019 and October 31, 2018, respectively.
Inventories
Inventories are valued at the lower of cost and net realizable value ("NRV"). Cost is principally determined using the first-in, first-out method. Our gross used truck inventory was $169 million at January 31, 2019 compared to $154 million at October 31, 2018, offset by reserves of $33 million and $31 million, respectively.
Property and Equipment
We report land, buildings, leasehold improvements, machinery and equipment (including tooling and pattern equipment), furniture, fixtures, and equipment, and equipment leased to others at cost, net of depreciation. We initially record assets under capital lease obligations at the lower of their fair value or the present value of the aggregate future minimum lease payments. We depreciate our assets using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets.
We test for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (hereinafter referred to as "asset group") may not be recoverable by comparing the sum of the estimated undiscounted future cash flows expected to result from the operation of the asset group and its eventual disposition to the carrying value. During 2017, we identified a triggering event related to continued economic weakness in Brazil which resulted in the decline in forecasted results for the Brazilian asset group. The Brazilian asset group is included in the Global Operations segment. As a result, we estimated the recoverable amount of the asset group and determined that the sum of the undiscounted future cash flows exceeds the carrying value and the asset group was not impaired. Significant adverse changes to our business environment and future cash flows could cause us to record impairment charges in future periods, which could be material.



11




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



Product Warranty Liability
The following table presents accrued product warranty and deferred warranty revenue activity:
 
Three Months Ended January 31,
(in millions)
2019
 
2018
Balance at beginning of period
$
529

 
$
629

Costs accrued and revenues deferred
52

 
29

Adjustments to pre-existing warranties(A)
(7
)
 
(6
)
Payments and revenues recognized
(68
)
 
(79
)
Other adjustments(B)
12

 

Balance at end of period
518

 
573

Less: Current portion
257

 
287

Noncurrent accrued product warranty and deferred warranty revenue
$
261

 
$
286

_________________________
(A)
Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior fiscal periods. Such adjustments typically occur when claims experience deviates from historic and expected trends. Our warranty liability is generally affected by component failure rates, repair costs, and the timing of failures. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.
(B)
Other adjustments include a $14 million increase in revenues deferred in connection with the adoption of the new revenue standard (as defined below regarding ASC 606), partially offset by a $2 million reduction in liability related to the sale of a majority interest in our defense business, ND Holdings, LLC (“Navistar Defense”).
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts, income tax contingency accruals and valuation allowances, product warranty accruals, asbestos and other product liability accruals, asset impairment charges, restructuring charges and litigation-related accruals. Actual results could differ from our estimates.
Concentration Risks
Our financial condition, results of operations, and cash flows are subject to concentration risks related to our significant unionized workforce. As of January 31, 2019, approximately 8,700, or 99%, of our hourly workers and approximately 700, or 13%, of our salaried workers, are represented by labor unions and are covered by collective bargaining agreements. In January 2019, certain of our United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") represented employees ratified a new six-year master collective bargaining agreement that replaced the prior agreement that expired in October 2018. Our future operations may be affected by changes in governmental procurement policies, budget considerations, changing national defense requirements, and political, regulatory and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).
Recently Adopted Accounting Standards
In March 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118". This ASU updates the income tax accounting in U.S. GAAP to reflect the SEC's interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (H.R.1) (the "Tax Act") was signed into law. We adopted this ASU on November 1, 2018. See Note 9, Income taxes for additional information.

12




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



In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". This ASU requires that an employer disaggregate the service cost component from the other components of net periodic benefit cost. In addition, only the service cost component will be eligible for capitalization. The amendments in this update are required to be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the Consolidated Statement of Operations and prospectively, on and after the adoption date, for the capitalization of the service cost component of net periodic benefit cost in assets. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We adopted this ASU on November 1, 2018, using a retrospective approach, which resulted in a reclassification of certain net periodic benefit costs from Selling, general and administrative ("SG&A") expenses to Other Income, net in our Consolidated Statements of Operations. See Note 8, Postretirement benefits for additional information.
The following table provides changes to our Consolidated Statements of Operations for the three months ended January 31, 2018:
(in millions)
 
Under Prior Standard
 
Effects of New Standard
 
As Reported
Selling, general and administrative expenses
 
$
222

 
$
(31
)
 
$
191

Other expense, net
 
49

 
31

 
80

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations: Clarifying the Definition of a Business" (Topic 805). This ASU provides a new framework for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This ASU creates an initial screening test (Step 1) that reduces the population of transactions that an entity needs to analyze to determine whether there is an input and substantive processes in the acquisition or disposal (Step 2). Fewer transactions are expected to involve acquiring or selling a business. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We adopted this ASU on November 1, 2018 with no material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows: Restricted Cash" (Topic 230). This ASU requires that a statement of cash flows explain the change during the period in the total of cash, and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We adopted this ASU on November 1, 2018 using a retrospective transition approach.
The following table provides changes to our Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 2018:
(in millions)
 
Under Prior Standard
 
Effects of New Standard
 
As Reported
Cash flows from investing activities
 
 
 
 
 
 
Net change in restricted cash and cash equivalents
 
$
46

 
$
(46
)
 
$

Net cash provided by investing activities
 
61

 
(46
)
 
15

Decrease in cash, cash equivalents and restricted cash
 
(7
)
 
(46
)
 
(53
)
Cash, cash equivalents and restricted cash at beginning of the period
 
706

 
134

 
840

Cash, cash equivalents and restricted cash at end of the period
 
699

 
88

 
787


13




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



In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory” (Topic 740). This ASU update requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We adopted this ASU on November 1, 2018 with no material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments” (Topic 230). This ASU provides guidance on how entities should classify eight specific cash flow transactions for which diversity in practice exists. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We adopted this ASU on November 1, 2018 with no material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (“ASC 606”), which supersedes the revenue recognition requirements in ASC 605, "Revenue Recognition." This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which postponed the effective date of ASU No. 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted on the original effective date for fiscal years beginning after December 15, 2016. We analyzed the impact of the ASU on our portfolio of customer contracts which resulted in changes in the timing and the amount of revenue recognized and gross versus net accounting for certain revenue streams in comparison with current guidance.
On November 1, 2018, we adopted the new accounting standard ASC 606, "Revenue from Contracts with Customers" and all the related amendments (“new revenue standard”) using the modified retrospective method to all contracts. Based on our assessment, the cumulative effect adjustment upon adoption of the new revenue standard had a $27 million impact on our Accumulated deficit. The primary impacts include an increase in Accumulated deficit due to an increase in the refund liability owed to our customers for future returns of core components. Previously our refund liability was recorded net of our future trade-in value to our suppliers. Under the new revenue standard, we record a liability for the amounts owed to our customers and a deposit asset for the amount we are currently eligible to receive from our suppliers. An additional increase relates to a change in the recognition pattern of revenue for extended warranty contracts. Revenue from these contracts was recognized on a straight-line basis over the life of the contract. Under the new revenue standard, revenue for extended warranty contracts is recorded in proportion to the costs expected to be incurred in satisfying the obligations based on historical cost patterns over the life of similar contracts. The increase in Accumulated deficit is partially offset by certain contracts where revenue recognition occurred as units were delivered and accepted. Under the new revenue standard, when the contract transfers control of a good to a customer as services or production occurs, revenue is recognized over time. An additional decrease in Accumulated deficit relates to certain sales that were recorded as leases or borrowings as we retained substantial risks of ownership. Under the new revenue standard, revenue is recognized upon transfer of control for these transactions, less the value of any guarantees provided to the customer. The adoption of the new revenue standard resulted in changes in the classification of Sales and revenues, net and Costs of products sold in our Consolidated Statements of Operations. The new revenue standard also resulted in changes in the classification of certain assets and liabilities in our Consolidated Balance Sheets.
We have revised our relevant policy and procedures and provided expanded revenue recognition disclosures based on the new qualitative and quantitative disclosure requirements of the standard in Note 2, Revenue.

14




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



The cumulative effects of the adjustments made to our November 1, 2018 Consolidated Balance Sheet for the adoption of the new revenue standard were as follows:
(in millions)
 
Balance at October 31, 2018
 
Change Due to New Standard
 
Balance at November 1, 2018
ASSETS
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Trade and other receivables, net
 
$
456

 
$
(8
)
 
$
448

Inventories, net
 
1,110

 
(91
)
 
1,019

Other current assets
 
189

 
101

 
290

Total current assets
 
5,136

 
2

 
5,138

Property and equipment, net
 
1,370

 
(109
)
 
1,261

Deferred taxes, net
 
121

 
1

 
122

Other noncurrent assets
 
113

 
(3
)
 
110

Total assets
 
$
7,230

 
$
(109
)
 
$
7,121

LIABILITIES and STOCKHOLDERS’ DEFICIT
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
Notes payable and current maturities of long-term debt
 
$
946

 
$
(15
)
 
$
931

Other current liabilities
 
1,255

 
13

 
1,268

Total current liabilities
 
3,807

 
(2
)
 
3,805

Long-term debt
 
4,521

 
(58
)
 
4,463

Other noncurrent liabilities
 
731

 
(22
)
 
709

Total liabilities
 
11,156

 
(82
)
 
11,074

Stockholders’ deficit
 
 
 
 
 
 
Total stockholders’ deficit attributable to Navistar International Corporation
 
(3,931
)
 
(27
)
 
(3,958
)
Total liabilities and stockholders’ deficit
 
$
7,230

 
$
(109
)
 
$
7,121

The following reconciles amounts as they would have been reported under the prior standard to current reporting:
 
 
Three months ended January 31, 2019(A)
(in millions)
 
Under Prior Standard
 
Effects of New Standard
 
As Reported
Sales of manufactured products, net
 
$
2,390

 
$
(4
)
 
$
2,386

Costs of products sold
 
1,986

 
(7
)
 
1,979

Interest expense
 
86

 
(1
)
 
85

Income (loss) before income tax
 
(6
)
 
4

 
(2
)
Income tax benefit
 
20

 
(1
)
 
19

Net income
 
$
14

 
$
3

 
$
17

______________________
(A)
Our Consolidated Statements of Operations for the three months ended January 31, 2019 includes two months of the operating activity of Navistar Defense prior to the sale of a majority interest in our defense business. See Note 3 Restructuring, Impairments and Divestitures for additional information.


15




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



 
 
As of January 31, 2019(A)
(in millions)
 
Under Prior Standard
 
Effects of New Standard
 
As Reported
ASSETS
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Trade and other receivables, net
 
$
441

 
$
(12
)
 
$
429

Inventories, net
 
1,260

 
(49
)
 
1,211

Other current assets
 
222

 
69

 
291

Total current assets
 
5,066

 
8

 
5,074

Property and equipment, net
 
1,402

 
(127
)
 
1,275

Other noncurrent assets
 
101

 
(3
)
 
98

Total assets
 
$
7,159

 
$
(122
)
 
$
7,037

LIABILITIES and STOCKHOLDERS’ DEFICIT
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
Notes payable and current maturities of long-term debt
 
$
957

 
$
(15
)
 
$
942

Other current liabilities
 
1,195

 
30

 
1,225

        Total current liabilities
 
3,636

 
15

 
3,651

Long-term debt
 
4,607

 
(55
)
 
4,552

Other noncurrent liabilities
 
734

 
(48
)
 
686

Total liabilities
 
10,938

 
(88
)
 
10,850

Stockholders’ deficit
 
 
 
 
 
 
Total stockholders’ deficit attributable to Navistar International Corporation
 
(3,782
)
 
(34
)
 
(3,816
)
Total liabilities and stockholders’ deficit
 
$
7,159

 
$
(122
)
 
$
7,037

_________________________
(A)
Our Consolidated Balance Sheet as of January 31, 2019 does not include the impact of Navistar Defense due to the sale of a majority interest in our defense business. See Note 3, Restructuring, Impairments and Divestitures for additional information.
Recently Issued Accounting Standards
In August 2018, FASB issued ASU No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement". This ASU provides guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) and determining when the arrangement includes a software license. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2021. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)". This ASU provides guidance on a reclassification from accumulated other comprehensive income to retained earnings for the effect of the tax rate change resulting from the Tax Act. The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2020. We are currently evaluating the impact of this ASU on our consolidated financial statements.

16




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



In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” (Topic 326). This ASU sets forth an expected credit loss model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, and certain off-balance sheet credit exposures. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Adoption will require a modified retrospective transition. This ASU is effective for us in the first quarter of fiscal 2021. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2020. We expect to adopt this ASU in the first quarter of fiscal 2020 on a modified retrospective basis by which the cumulative effect adjustment recognized in Accumulated deficit as of November 1, 2019. We will continue to evaluate the impact of this ASU on our consolidated financial statements.

2. Revenue
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Disaggregation of Revenue
The following tables disaggregate our external revenue by product type and geographic area for the three months ended January 31, 2019 (in millions):
Products and Services
(in millions)
Truck
 
Parts
 
Global Operations
 
Financial
Services
 
Corporate
and
Eliminations
 
Total
Three Months Ended January 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Truck products and services(A)(B)
$
1,677

 
$

 
$

 
$

 
$
3

 
$
1,680

Truck contract manufacturing
18

 

 

 

 

 
18

Used trucks
51

 

 

 

 

 
51

Engines

 
66

 
45

 

 

 
111

Parts
1

 
480

 
16

 

 

 
497

Extended warranty contracts
29

 

 

 

 

 
29

Sales of manufactured products, net
1,776

 
546

 
61

 

 
3

 
2,386

Retail financing(C)

 

 

 
35

 

 
35

Wholesale financing(C)

 

 

 
12

 

 
12

Sales and revenues, net
$
1,776

 
$
546

 
$
61

 
$
47

 
$
3

 
$
2,433

_________________________
(A)
Includes other markets primarily consisting of Bus, Export Truck and Mexico. Also includes revenue of $3 million related to certain third-party financings initially recorded as borrowings, and operating lease revenue of $1 million.
(B)
Includes military sales of $62 million. In December 2018, we completed the previously announced sale of a 70% equity interest in Navistar Defense. See Note 3, Restructuring, Impairments and Divestitures for additional information.
(C)
Retail financing and Wholesale financing revenues in the Financial Services segment include interest revenue of $13 million and $12 million, respectively, for the three months ended January 31, 2019.

17




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



Geography
(in millions)
Truck
 
Parts
 
Global Operations
 
Financial
Services
 
Corporate
and
Eliminations
 
Total
Three Months Ended January 31, 2019
 
 
 
 
 
 
 
 
 
 
 
United States
$
1,468

 
$
455

 
$

 
$
23

 
$
3

 
$
1,949

Canada
135

 
49

 

 

 

 
184

Mexico
66

 
25

 

 
24

 

 
115

Brazil

 

 
53

 

 

 
53

Other
107

 
17

 
8

 

 

 
132

Sales and revenues, net
$
1,776

 
$
546

 
$
61

 
$
47

 
$
3

 
$
2,433

Trucks, Truck Contract Manufacturing, Used trucks, Engines and Parts
Revenue for our Truck products and services, certain truck contract manufacturing, Used trucks, certain Engines and Parts is recognized at a point in time when control is transferred to the customer. Our Trucks, Used Trucks, Engines, and Parts have a standard warranty, the estimated cost of which is included in Costs of products sold. Operating lease and borrowing revenues are recognized on a straight-line basis over the life of the lease.
Certain truck sales to the U.S. government of non-commercial products manufactured to government specification, and certain truck and other contract manufacturing arrangements are recognized over time as the goods are manufactured. We recognize revenue over time when the finished assets have no alternative use and we have a right to payment for work performed in the event of a contract cancellation or when we create or enhance an asset that the customer controls as it is being created or enhanced. We recognize revenue using a cost-based input method because it best depicts our progress in satisfying the performance obligation. The selection of the method requires judgement and is based on the nature of the products or services to be provided.
Certain terms or modifications to U.S. and foreign government contracts may be unpriced; that is, the work to be performed is defined, but the related contract price is to be negotiated at a later date. In situations where we can reliably estimate a profit margin in excess of costs incurred, revenue and gross margin are recorded for delivered contract items. Otherwise, revenue is recognized when the price has been agreed with the applicable government and costs are deferred when it is probable that the costs will be recovered.
An allowance for sales returns is recorded as a reduction to revenue based upon estimates using historical information about returns. This includes when the Company is a reseller of certain service parts that include a core component. A core component is the basic forging or casting, such as an engine block, that can be remanufactured by a certified remanufacturing supplier. When a dealer returns a core component within the specified eligibility period, we refund the core return deposit, which is applied to the customer's account balance.
Extended Warranty Contracts
We sell separately-priced extended warranty contracts that can be purchased for periods ranging from one to ten years. Warranty revenue related to extended warranty contracts is recognized over the life of the contract in proportion to the costs expected to be incurred in satisfying the obligation under the contract. Costs under extended warranty contracts are expensed as incurred. We recognize losses on defined pools of extended warranty contracts when the remaining expected costs for a given pool of contracts exceed the related deferred revenue.
Retail and Wholesale Financing
Financial Services operations recognize revenue from retail notes, finance leases, wholesale notes, retail accounts, and wholesale accounts as Finance revenues over the term of the receivables utilizing the effective interest method. Certain direct origination costs and fees are deferred and recognized as adjustments to yield and are reported as part of interest income over the life of the receivable. Loans are impaired when we conclude it is probable the customer will not be able to make full payment according to contractual terms after reviewing the customer's financial performance, payment ability, capital-raising potential, management style, economic situation, and other factors. The accrual of interest on such loans is suspended when the loan becomes 90 days or more past due. Finance revenues on these loans are recognized only to the extent cash payments are received. We resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured.

18




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



Operating lease revenues are recognized on a straight-line basis over the life of the lease. Recognition of revenue is suspended when management determines the collection of future revenue is not probable. Recognition of revenue is resumed if collection again becomes probable.
Performance Obligations
Generally, revenue from our sales is recognized at a point in time when control is transferred to the customer which generally occurs upon shipment from our plants and distribution centers or at the time of delivery to our customers. The standard payment term is less than 30 days, but we may extend payment terms on selected receivables. We have elected the practical expedient that allows the Company to not assess whether a contract has a significant financing component when the time between cash collection and transfer of control is less than one year.
We recognize price allowances, returns and the cost of incentive programs in the normal course of business based on programs offered to dealers or fleet customers. Estimates are made for sales incentives on certain vehicles in dealer stock inventory based on historical experience and announced special programs. The estimated sales incentives and returns are adjusted at the earlier of when the estimate of consideration we expect to receive changes or the consideration becomes fixed. For contracts where there is more than one performance obligation, discounts are allocated to all of the performance obligations in the contract based on their relative standalone selling prices.
Revenue on bill and hold arrangements is not recognized until after the customer is notified that the product (i) has been completed according to customer specifications, (ii) has passed our quality control inspections, (iii) is ready for physical transfer to the customer and (iv) the reason for the bill and hold arrangement is substantive.
We have elected to account for shipping and handling activities that occur subsequent to transfer of control as a fulfillment cost and not as a separate performance obligation. The costs are recognized as an expense in Costs of products sold when incurred. As a practical expedient, we do not disclose the transaction price related to order backlogs as they have an original expected duration of less than one year.
We exclude from revenue any sales taxes, value added taxes and other related taxes collected from customers.
For the three months ended January 31, 2019, the impact of changes to revenue related to performance obligations satisfied in a prior period was not material to our consolidated financial statements.
Contract Balances
Most of our contracts are for a period of less than one year. We have certain long-term contract manufacturing and extended warranty contracts that extend beyond one year. We record deferred revenue, primarily related to extended warranty contracts, when we receive consideration from a customer prior to transferring goods or services under the terms of a sales contract. This deferred revenue represents contract liabilities which are included in our Consolidated Balance Sheets as components of current and long-term liabilities. The amount of manufacturing contract liabilities is not material to our consolidated financial statements.
The amount of deferred revenue related to extended warranty contracts was $269 million and $255 million at January 31, 2019 and October 31, 2018, respectively. Revenue recognized under our extended warranty programs for the three months ended January 31, 2019 and 2018 was $29 million, for both periods. We expect to recognize revenue under our extended warranty programs of approximately $71 million in the remainder of 2019, $77 million in 2020, $58 million in 2021, $35 million in 2022, $18 million in 2023 and $10 million thereafter.
Contract Costs
We recognize incremental costs to obtain contracts as an asset if they are recoverable. As a practical expedient, we recognize the costs of obtaining a contract as an expense when the related contract period is less than one year. We have no contract costs capitalized as of January 31, 2019.
3. Restructuring, Impairments and Divestitures
Restructuring charges are recorded based on restructuring plans that have been committed to by management and are, in part, based upon management's best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities.

19




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



Manufacturing Restructuring Activities
We continue to focus on our core Truck and Parts businesses and evaluate our portfolio of assets to validate their strategic and financial fit. This allows us to close or divest non-strategic businesses and identify opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure.
For those areas that fall outside our strategic businesses, we evaluate alternatives which could result in additional restructuring and other related charges in the future, including but not limited to: (i) impairments, (ii) costs for employee and contractor termination and other related benefits, and (iii) charges for pension and other postretirement contractual benefits and curtailments. These charges could be significant.
Global operations employee separation actions
In the fourth quarter of 2017, we initiated cost-reduction actions impacting our workforce in Brazil. As a result of these actions, we recognized restructuring charges of $6 million in personnel costs for employee separation and related benefits. In the first quarter of 2018, we recognized a benefit of $1 million upon the completion of these separation actions. This benefit was recorded in our Global operations segment within Restructuring charges in our Consolidated Statements of Operations.
Melrose Park Facility restructuring activities
In the third quarter of 2017, we committed to a plan to cease engine production at our plant in Melrose Park, Illinois (“Melrose Park Facility”) in the third quarter of fiscal year 2018. As a result, in the third quarter of 2017, we recognized charges of $41 million in our Truck segment. The charges include $23 million related to pension and other post-employment benefits ("OPEB") liabilities and $8 million for severance pay recorded in Restructuring charges in our Consolidated Statements of Operations. We also recorded $10 million of inventory reserves and other related charges in Costs of products sold in our Consolidated Statements of Operations. In the first quarter of 2018, we recognized a benefit of $2 million related to the finalized cessation of the production agreement. This benefit was recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. Production at the Melrose Park Facility ceased on May 17, 2018.
Asset Impairments
In the three months ended January 31, 2019, we concluded that we had triggering events related to certain operating leases. As a result, a charge of $2 million was recorded in our Truck segment.
In the first quarter of 2018, we concluded that we had triggering events related to the sale of our railcar business in Cherokee, Alabama requiring the impairment of certain long-lived assets. As a result, we recorded a charge of $2 million in our Truck segment. In February 2018, we completed the sale of the business.
These charges were recorded in Asset impairment charges in our Consolidated Statements of Operations.
See Note 10, Fair Value Measurements, for information on the valuation of impaired operating leases and other assets.
Navistar Defense Divestiture
In December 2018, we completed the previously announced sale of a 70% equity interest in Navistar Defense, to an affiliate of Cerberus Capital Management, L.P. In connection with the closing of the transaction, we entered into an exclusive long-term agreement to supply military and commercial parts and chassis to Navistar Defense. We also entered into an intellectual property agreement and a transition services agreement concurrent with the sale.
The Navistar Defense purchase price, adjusted for certain calendar year 2018 chargeouts, was approximately $140 million, which was further subject to additional adjustments for working capital, transfers of certain liabilities and commitments, and other items. The transaction also includes potential additional consideration of up to $17 million, not included in the gain on the sale, based on cash proceeds from certain contracts which exceed defined thresholds.
We recognized a gain on the sale in our Truck segment of $54 million in Other expense, net in our Consolidated Statements of Operations.
4. Finance Receivables
Finance receivables are receivables of our Financial Services operations. Finance receivables generally consist of wholesale notes and accounts, as well as retail notes, finance leases and accounts. Total finance receivables reported on the Consolidated Balance Sheets are net of an allowance for doubtful accounts. Total assets of our Financial Services operations net of intercompany balances were $2.6 billion as of January 31, 2019 and October 31, 2018.

20




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



Included in total assets of our Financial Services operations were finance receivables of $2.1 billion and $2.2 billion as of January 31, 2019 and October 31, 2018, respectively. We have two portfolio segments of finance receivables that we distinguish based on the type of customer and nature of the financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.
Our Finance receivables, net in our Consolidated Balance Sheets consist of the following:
(in millions)
January 31, 2019
 
October 31, 2018
Retail portfolio
$
713

 
$
720

Wholesale portfolio
1,400

 
1,460

Total finance receivables
2,113

 
2,180

Less: Allowance for doubtful accounts
23

 
22

Total finance receivables, net
2,090

 
2,158

Less: Current portion, net(A)
1,818

 
1,898

Noncurrent portion, net
$
272

 
$
260

_________________________
(A)
The current portion of finance receivables is computed based on contractual maturities. Actual cash collections typically vary from the contractual cash flows because of prepayments, extensions, delinquencies, credit losses, and renewals.
Securitizations
Our Financial Services operations transfer wholesale notes, retail accounts receivable, finance leases, and operating leases to special purpose entities ("SPEs"), which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities issued. In addition to servicing receivables, our continued involvement in the SPEs may include an economic interest in the transferred receivables and, in some cases, managing exposure to interest rate changes on the securities using interest rate swaps or interest rate caps. There were no transfers of finance receivables that qualified for sale accounting treatment as of January 31, 2019 and October 31, 2018, and as a result, the transferred finance receivables are included in our Consolidated Balance Sheets and the related interest earned is included in Finance revenues.
We transfer eligible finance receivables into owner trusts in order to issue asset-backed securities. These trusts are VIEs of which we are determined to be the primary beneficiary, and, therefore, the assets and liabilities of the trusts are included in our Consolidated Balance Sheets. The outstanding balance of finance receivables transferred into these VIEs was $984 million and $956 million as of January 31, 2019 and October 31, 2018, respectively.
Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $222 million and $235 million as of January 31, 2019 and October 31, 2018, respectively. For more information on assets and liabilities of consolidated VIEs and other securitizations accounted for as secured borrowings by our Financial Services segment, see Note 1, Summary of Significant Accounting Policies.
Finance Revenues
The following table presents the components of our Finance revenues in our Consolidated Statements of Operations:
 
Three Months Ended January 31,
(in millions)
2019

2018
Retail notes and finance leases revenue
$
14

 
$
11

Wholesale notes interest
31

 
25

Operating lease revenue
21

 
18

Retail and wholesale accounts interest
8

 
5

Gross finance revenues
74

 
59

Less: Intercompany revenues
27

 
21

Finance revenues
$
47

 
$
38


21




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



5. Allowance for Doubtful Accounts
Our two finance receivables portfolio segments, retail and wholesale, each consist of one class of receivable based on: (i) initial measurement attributes of the receivables, and (ii) the assessment and monitoring of risk and performance of the receivables. For more information, see Note 4, Finance Receivables.
The following tables present the activity related to our allowance for doubtful accounts for our retail portfolio segment, wholesale portfolio segment, and trade and other receivables:
 
Three Months Ended January 31, 2019
 
Three Months Ended January 31, 2018
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
19

 
$
3

 
$
28

 
$
50

 
$
17

 
$
3

 
$
28

 
$
48

Provision for doubtful accounts
1

 

 

 
1

 

 

 
1

 
1

Charge-off of accounts
(1
)
 

 

 
(1
)
 
(1
)
 

 

 
(1
)
Recoveries

 

 

 

 
1

 

 

 
1

Other(A)
1

 

 

 
1

 
1

 

 

 
1

Allowance for doubtful accounts, at end of period
$
20

 
$
3

 
$
28

 
$
51

 
$
18

 
$
3

 
$
29

 
$
50

____________________

(A)    Amounts include impact from currency translation.
The accrual of interest income is suspended on certain impaired finance receivables. Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on non-accrual status. In certain cases, we continue to collect payments on our impaired finance receivables.
The following table presents information regarding impaired finance receivables:
 
January 31, 2019
 
October 31, 2018
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Impaired finance receivables with specific loss reserves
$
20

 
$

 
$
20

 
$
20

 
$

 
$
20

Impaired finance receivables without specific loss reserves

 

 

 

 

 

Specific loss reserves on impaired finance receivables
9

 

 
9

 
9

 

 
9

Finance receivables on non-accrual status
20

 

 
20

 
20

 

 
20

The average balances of the impaired finance receivables in the retail portfolio were $21 million and $18 million during the three months ended January 31, 2019 and 2018, respectively. See Note 10, Fair Value Measurements, for information on the valuation of impaired finance receivables.
We use the aging of our receivables as well as other inputs when assessing credit quality. The following table presents the aging analysis for finance receivables:
 
January 31, 2019
 
October 31, 2018
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Current, and up to 30 days past due
$
636

 
$
1,399

 
$
2,035

 
$
655

 
$
1,459

 
$
2,114

30-90 days past due
57

 
1

 
58

 
51

 
1

 
52

Over 90 days past due
20

 

 
20

 
14

 

 
14

Total finance receivables
$
713

 
$
1,400

 
$
2,113

 
$
720

 
$
1,460

 
$
2,180


22




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



6. Inventories
The following table presents the components of Inventories in our Consolidated Balance Sheets:
(in millions)
January 31,
2019
 
October 31,
2018
Finished products
$
739

 
$
671

Work in process
163

 
118

Raw materials
309

 
321

Total inventories, net
$
1,211

 
$
1,110

7. Debt
The following tables present the components of Notes payable and current maturities of long-term debt and Long-term debt in our Consolidated Balance Sheets:
(in millions)
January 31, 2019

October 31, 2018
Manufacturing operations
 
 
 
Senior Secured Term Loan Credit Agreement, due 2025, net of unamortized discount of $7 at both dates, and unamortized debt issuance costs of $11 at both dates
$
1,566

 
$
1,570

6.625% Senior Notes, due 2026, net of unamortized debt issuance costs of $16 and $17, respectively
1,084

 
1,083

4.75% Senior Subordinated Convertible Notes, due 2019, net of unamortized discount of $2 and $5, respectively, and unamortized debt issuance costs of $1 at both dates
408

 
405

Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040, net of unamortized debt issuance costs of $5 at both dates
220

 
220

Financed lease obligations
52

 
122

Other
13

 
26

Total Manufacturing operations debt
3,343

 
3,426

Less: Current portion
437

 
461

Net long-term Manufacturing operations debt
$
2,906

 
$
2,965

(in millions)
January 31, 2019
 
October 31, 2018
Financial Services operations
 
 
 
Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2023, net of unamortized debt issuance costs of $4 at both dates
$
992

 
$
948

Senior secured NFC Term Loan, due 2025, net of unamortized discount of $2 at both dates, and unamortized debt issuance costs of $4 at both dates
393

 
394

Bank credit facilities, at fixed and variable rates, due dates from 2019 through 2025, net of unamortized debt issuance costs of $1 and $2, respectively
616

 
519

Commercial paper, at variable rates, program matures in 2022
62

 
75

Borrowings secured by operating and finance leases, at various rates, due serially through 2024
88

 
105

Total Financial Services operations debt
2,151

 
2,041

Less: Current portion
505

 
485

Net long-term Financial Services operations debt
$
1,646

 
$
1,556

Financial Services Operations
Asset-backed Debt
In November 2018, the maturity of our $350 million variable funding notes ("VFN") facility was extended from December 2018 to May 2020.

23




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



In December 2018, the maturity of our $100 million Truck Retail Accounts Corporation ("TRAC") funding facility was extended from January 2019 to January 2020.
8. Postretirement Benefits
Defined Benefit Plans
We provide postretirement benefits to a substantial portion of our employees and retirees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, surviving spouses and dependents.
Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. For the three months ended January 31, 2019 and 2018, we contributed $131 million and $21 million, respectively, to our pension plans to meet regulatory funding requirements. During the first quarter of 2019, we accelerated the payment of a substantial portion of our 2019 minimum required funding. We expect to contribute approximately $9 million to our pension plans during the remainder of 2019.
We primarily fund OPEB obligations, such as retiree medical, in accordance with the 1993 Settlement Agreement (the "1993 Settlement Agreement"), which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base Trust"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of our then applicable retiree health care and life insurance benefits. Contributions for the three months ended January 31, 2019 and 2018, as well as anticipated contributions for the remainder of 2019, are not material.
Components of Net Periodic Benefit Expense
Net periodic benefit expense included in our Consolidated Statements of Operations, and other amounts recognized in our Consolidated Statements of Stockholders' Deficit, for the three months ended January 31, 2019 and 2018 are comprised of the following:
 
Three Months Ended January 31,
 
Pension Benefits
 
Health and Life
Insurance Benefits
(in millions)
2019
 
2018
 
2019
 
2018
Service cost for benefits earned during the period
$
2

 
$
2

 
$
1

 
$
1

Interest on obligation
32

 
27

 
12

 
11

Amortization of cumulative loss
24

 
26

 

 
2

Settlements
142

 
9

 

 

Premiums on pension insurance
1

 
2

 

 

Expected return on assets
(38
)
 
(40
)
 
(5
)
 
(6
)
Net periodic benefit expense
$
163

 
$
26

 
$
8

 
$
8

In the first quarter of 2019, we adopted ASU No. 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." This ASU requires than an employer disaggregate the service cost component from the other components of net periodic benefit cost. As a result, we have reclassified certain net periodic benefit costs from SG&A expenses to Other expense, net in our Consolidated Statements of Operations. The guidance, which required retrospective application, resulted in recording a reclassification of $31 million as of January 31, 2018.
In the three months ended January 31, 2019 and 2018, we purchased group annuity contracts for certain retired pension plan participants resulting in plan remeasurements. The purchase of the group annuity contracts was funded directly by the assets of our Canadian pension plans. As a result, net actuarial losses of $11 million and $2 million, respectively, were recognized as components of Accumulated other comprehensive loss and non-cash pension settlement accounting expenses of $142 million and $9 million, respectively, were recognized in Other expense, net in our Consolidated Statements of Operations.

24




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



Defined Contribution Plans and Other Contractual Arrangements
Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the Company. Effective January 1, 2019, we deposit the matching contribution monthly. Many participants covered by the plans receive annual Company contributions to their retirement accounts based on an age-weighted percentage of the participant's eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $8 million and $7 million in the three months ended January 31, 2019 and 2018, respectively.
In accordance with the 1993 Settlement Agreement, an independent Retiree Supplemental Benefit Trust (the "Supplemental Trust") was established. The Supplemental Trust, and the benefits it provides to certain retirees pursuant to a certain Retiree Supplemental Benefit Program under the 1993 Settlement Agreement ("Supplemental Benefit Program"), is not part of our consolidated financial statements.
Our contingent profit sharing obligations under a certain Supplemental Benefit Trust Profit Sharing Plan ("Supplemental Benefit Trust Profit Sharing Plan") will continue until certain funding targets defined by the 1993 Settlement Agreement are met. We record profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits. For more information on pending arbitration regarding the Supplemental Benefit Trust Profit Sharing Plan, see Note 11, Commitments and Contingencies.
9. Income Taxes
We compute, on a quarterly basis, an estimated annual effective tax rate considering ordinary income and related income tax expense. Tax jurisdictions with a projected or year to date loss for which a tax benefit cannot be realized are excluded. Ordinary income refers to income (loss) before income tax expense excluding significant unusual or infrequently occurring items. The tax effect of a significant unusual or infrequently occurring item is recorded in the interim period in which the item occurs. We included an income tax benefit of $38 million in the current quarter for the tax effect of the Canadian pension settlement as a significant unusual or infrequently occurring item. Other items included in income tax expense in the periods in which they occur include the tax effects of cumulative changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment regarding the ability to realize deferred tax assets in future years.
On December 22, 2017, the Tax Act was signed into U.S. law. On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company’s financial statement effects were reported on a provisional basis for the year ended October 31, 2018. The remeasurement period for SAB 118 ended on December 22, 2018. The Tax Act reduced the statutory corporate income tax rate from 35% to 21%, effective January 1, 2018. This rate reduction required us to remeasure our deferred taxes as of the date the Tax Act was enacted. Our U.S. deferred tax assets, net of deferred tax liabilities, were remeasured and reduced by $983 million, entirely offset by a valuation allowance reduction. As a result, the remeasurement of our deferred tax assets, net of deferred tax liabilities, including the valuation allowance, did not impact our income tax expense or net income. The Tax Act also included a mandatory deemed repatriation of earnings of the Company’s foreign subsidiaries and resulted in a one-time transition tax for the year ended October 31, 2018. We included $147 million of foreign earnings in taxable income due to this deemed repatriation. The deferred tax impact had a valuation allowance offset, resulting in no impact on our income tax expense or net income.
The income tax accounting for the effect of the rate change on deferred taxes and the mandatory deemed repatriation is complete.
The Tax Act also included many other provisions, including changes to limits on the deductions for executive compensation and interest expense, a tax on global intangible low‐taxed income (“GILTI”), the base erosion anti‐abuse tax (“BEAT”) and a deduction for foreign derived intangible income (“FDII”). We have included the impact of these provisions in our interim period tax calculations, which first apply to our taxable year beginning November 1, 2018. Companies can either account for taxes on GILTI as incurred or recognize deferred taxes when basis differences exist that are expected to affect the amount of the GILTI inclusion upon reversal. The Company is electing to account for taxes on GILTI as incurred.
We will continue to evaluate the Tax Act’s impact, which may change as a result of additional Treasury guidance, federal or state legislative actions, or changes in accounting standards or related interpretations. The Company’s analyses performed to date are sufficient to calculate a reasonable estimate of the impacts of the Tax Act.

25




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



We have evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. We continue to maintain a valuation allowance on the majority of our U.S. deferred tax assets as well as certain foreign deferred tax assets that we believe, on a more-likely-than-not basis, will not be realized based on current forecasted results. For all remaining deferred tax assets, while we believe that it is more likely than not that they will be realized, we believe that it is reasonably possible that additional deferred tax asset valuation allowances could be required in the next twelve months.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of January 31, 2019, the amount of liability for uncertain tax positions was $30 million. The liability at January 31, 2019 has a recorded offsetting tax benefit associated with various issues that total $9 million. If the unrecognized tax benefits are recognized, all would impact our effective tax rate, except for positions for which we maintain a full valuation allowance against certain deferred tax assets. In this case, the effect may be in the form of an increase in the deferred tax asset related to our net operating loss carryforward, which would be offset by a full valuation allowance.
We recognize interest and penalties related to uncertain tax positions as part of Income tax expense. Total interest and penalties for the three months ended January 31, 2019 and 2018 related to our uncertain tax positions resulted in an income tax expense of less than $1 million, for both periods.
We have open tax years back to 2001 with various significant taxing jurisdictions, including the U.S., Canada, Mexico, and Brazil. In connection with the examination of tax returns, contingencies may arise that generally result from differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenues or expenses in taxable income, or the sustainability of tax credits to reduce income taxes payable. We believe we have sufficient accruals for our contingent tax liabilities. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns, although actual results may differ. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next twelve months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash flows.
10. Fair Value Measurements
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, we classify each fair value measurement as follows:
Level 1—based upon quoted prices for identical instruments in active markets,
Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
Level 3—based upon one or more significant unobservable inputs.
The following section describes key inputs and assumptions in our valuation methodologies:
Cash Equivalents and Restricted Cash Equivalents—Cash equivalents are highly liquid investments, with an original maturity of 90 days or less, which may include U.S. government and federal agency securities, commercial paper, and other highly liquid investments. The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents approximate fair value because of the short-term maturity and highly liquid nature of these instruments.
Marketable Securities—Our marketable securities portfolios are classified as available-for-sale and may include investments in U.S. government and federal agency securities, commercial paper and other investments with an original maturity greater than 90 days. We use quoted prices from active markets to determine fair value.
Derivative Assets and Liabilities—We measure the fair value of derivatives assuming that the unit of account is an individual derivative transaction and that each derivative could be sold or transferred on a stand-alone basis. We classify within Level 2 our derivatives that are traded over-the-counter and valued using internal models based on observable market inputs.

26




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



Guarantees—We provide certain guarantees of payments and residual values, to which losses are generally capped, to specific counterparties. The fair value of these guarantees includes a contingent component and a non-contingent component that are based upon internally developed models using unobservable inputs. We classify these liabilities within Level 3. For more information regarding guarantees, see Note 11, Commitments and Contingencies.
Impaired Finance Receivables and Impaired Assets Under Operating Leases—Fair values of the underlying collateral are determined by current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. For more information regarding impaired finance receivables, see Note 5, Allowance for Doubtful Accounts.
Impaired Property, Plant and Equipment—We measure the fair value by discounting future cash flows expected to be received from the operation of, or disposition of, the asset or asset group that has been determined to be impaired. For more information regarding the impairment of property, plant and equipment, see Note 3, Restructurings and Impairments.
The following table presents the financial instruments measured at fair value on a recurring basis:
 
As of January 31, 2019
 
As of October 31, 2018
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency securities
$
41

 
$

 
$

 
$
41

 
$
101

 
$

 
$

 
$
101

Derivative financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity forward contracts(A)

 

 

 

 

 
2

 

 
2

Interest rate caps(B)

 
1

 

 
1

 

 
2

 

 
2

Total assets
$
41

 
$
1

 
$

 
$
42

 
$
101

 
$
4

 
$

 
$
105

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity forward contracts(C)
$

 
$
1

 
$

 
$
1

 
$

 
$

 
$

 
$

Guarantees

 

 
21

 
21

 

 

 
24

 
24

Total liabilities
$

 
$
1

 
$
21

 
$
22

 
$

 
$

 
$
24

 
$
24

_________________________
(A)
The asset value of commodity forward contracts is included in Other current assets in the accompanying Consolidated Balance Sheets.
(B)
The asset value of interest rate caps is included in Other noncurrent assets in the accompanying Consolidated Balance Sheets.
(C)
The liability value of commodity forward contracts is included in Other current liabilities in the accompanying Consolidated Balance Sheets.
The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy:
 
Three Months Ended January 31,
(in millions)
2019
 
2018
Guarantees, at beginning of period
$
(24
)
 
$
(21
)
Transfers out of Level 3

 

Net terminations (issuances)
2

 
(5
)
Settlements
1

 
1

Guarantees, at end of period
$
(21
)
 
$
(25
)
In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to market on a recurring basis. The carrying amounts of Cash and cash equivalents, Restricted cash and cash equivalents, and Accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables generally consist of retail and wholesale accounts and notes.
The carrying amounts of Trade and other receivables and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their variable interest rate terms. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below.

27




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



The fair values of our retail notes are estimated by discounting expected cash flows at estimated current market rates. The fair values of our retail notes are classified as Level 3 financial instruments.
The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. The 6.75% Tax Exempt Bonds, due 2040, are traded, but the trading market is illiquid, and as a result, the Loan Agreement underlying the Tax Exempt Bonds is classified as Level 2. Trading in our 6.625% Senior Notes is limited to qualified institutional buyers; therefore the notes are classified as Level 2. The fair values of our Level 3 debt instruments are generally determined using internally developed valuation techniques such as discounted cash flow modeling. Inputs such as discount rates and credit spreads reflect our estimates of assumptions that market participants would use in pricing the instrument and may be unobservable.
The following tables present the carrying values and estimated fair values of financial instruments:
 
As of January 31, 2019
 
Estimated Fair Value
 
Carrying Value
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets
 
 
 
 
 
 
 
 
 
Retail notes