Consolidated Financial Statements and Management’s Discussion and Analysis for the Quarterly Period Ended


January 31, 2019


























NAVISTAR FINANCIAL CORPORATION





A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR, INC., WHICH IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL CORPORATION








2701 Navistar Drive, Lisle, IL 60532





Telephone number  (331) 332-4000




















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NAVISTAR FINANCIAL CORPORATION


AND SUBSIDIARIES














INDEX





FINANCIAL INFORMATIONPageReferenceConsolidated Financial Statements:Consolidated Statements of Operations (Unaudited) - Three Months Ended January 31, 2019 and 20183Consolidated Statements of Financial Condition - January 31, 2019 (Unaudited) and October 31, 20184Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended     January 31, 2019 and 20185Consolidated Statements of Shareowner’s Equity (Unaudited) - Three Months Ended January 31, 2019 and 20186Notes to Consolidated Financial Statements(Unaudited)7Management’s Discussion and Analysis of Financial Condition and Results of            Operations20























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Navistar Financial Corporation and Subsidiaries


Consolidated Statements of Operations (Unaudited)





For the Three Months Ended January 31,Millions of dollars20192018RevenuesWholesale notes interest$23.0$14.6Retail notes and finance leases revenue0.70.6Operating leases revenue12.910.5Retail and wholesale accounts interest6.94.7Other revenues6.11.0Total revenues49.631.4ExpensesCost of borrowing:Interest expense12.47.3Other1.92.2Credit, collections and administrative4.74.5Provision for (recovery of) credit losses——Depreciation on operating leases10.18.2Other(0.8)—Total expenses28.322.2Income before taxes21.39.2Income tax expense4.91.2Net income$16.4$8.0








See Notes to Consolidated Financial Statements








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Navistar Financial Corporation and Subsidiaries


Consolidated Statements of Financial Condition





As of January 31,As of October 31,Millions of dollars20192018(Unaudited)ASSETSCash and cash equivalents$19.5$22.7Finance receivables, net of unearned income:Finance receivables1,575.91,564.8Finance receivables from affiliates40.0—Allowance for losses(1.6)(1.6)Finance receivables, net1,614.31,563.2Unsecured loans to affiliates200.0150.0Net investment in operating leases177.3166.8Restricted cash and cash equivalents103.474.0Vehicle inventory1.14.9Other assets6.85.4Total assets$2,122.4$1,987.0LIABILITIES AND SHAREOWNER’S EQUITYNet accounts due to affiliates$99.5$156.4Senior and secured borrowings1,611.11,437.4Other liabilities43.441.2Total liabilities1,754.01,635.0Shareowner’s equityCapital stock ($1 par value, 2,000,000 shares authorized, 1,600,000 sharesissued and outstanding)1.61.6Paid-in capital134.6134.6Retained earnings232.2215.8Total shareowner’s equity368.4352.0Total liabilities and shareowner’s equity$2,122.4$1,987.0








See Notes to Consolidated Financial Statements











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Navistar Financial Corporation and Subsidiaries


Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended January 31,Millions of dollars20192018Cash flow from operating activities:Net income$16.4$8.0Adjustments to reconcile net incometo cash flow from operations:Net (gain) loss on sale, impairment and terminations of property, equipment under operating leases and vehicle inventory(0.2)(0.2)Depreciation and amortization11.49.9Provision for (recovery of) credit losses——Net change in net accounts due to affiliates(56.9)(8.4)Net change in other assets and liabilities(0.3)1.4Net cash (used in) provided by operating activities(29.6)10.7Cash flow from investing activities:Originations of notes and finance leases held for investment,includes affiliates(1,187.6)(810.1)Collections on notes and finance leases held for investment,net of change in affiliate loans and unearned finance income1,143.7877.9Net change in finance receivables - accounts(7.2)34.6Proceeds from sale of vehicle inventory6.90.5Purchase of equipment leased to others(23.0)(35.4)Net change in unsecured loans to affiliates(50.0)—Proceeds from sale of equipment under operating leases0.80.4Net cash (used in) provided by investing activities(116.4)67.9Cash flow from financing activities:Net change in revolving component of bank credit facility143.0(3.0)Principal payments on term component of bank credit facility—(2.0)Principal payments on term loan(1.0)—Net change in secured revolving credit facilities47.7(150.4)Proceeds from issuance of secured borrowings—16.2Payments on secured borrowings(16.7)(5.4)Debt issuance costs(0.8)(0.4)Net cash provided by (used in) financing activities172.2(145.0)Change in cash, cash equivalents and restricted cash26.2(66.4)Cash, cash equivalents and restricted cash, beginning of period96.7114.4Cash, cash equivalents and restricted cash, end of period$122.9$48.0Supplemental cash flow information:Interest paid$12.8$7.4Income taxes paid, net of (refunds)(0.2)—Transfers of loans and leases to vehicle inventory3.01.2Impairments charged to affiliates1.70.5








See Notes to Consolidated Financial Statements





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Navistar Financial Corporation and Subsidiaries


Consolidated Statements of Shareowner’s Equity (Unaudited)


Millions of dollarsCapital StockPaid-In CapitalRetained EarningsTotalBalance at October 31, 2017$1.6$134.6$174.6$310.82018 Activity:Net income——8.08.0Balance at January 31, 2018$1.6$134.6$182.6$318.8Balance at October 31, 2018$1.6$134.6$215.8$352.02019 Activity:Net income——16.416.4Balance at January 31, 2019$1.6$134.6$232.2$368.4








See Notes to Consolidated Financial Statements











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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)











1. SUMMARY OF ACCOUNTING POLICIES





Nature of Operations





Navistar Financial Corporation was incorporated in Delaware in 1949 and is a wholly-owned subsidiary of Navistar, Inc. which is a wholly-owned subsidiary of Navistar International Corporation (“NIC”).  As used herein, “us,” “we,” “our” or “NFC” refers to Navistar Financial Corporation and its wholly-owned subsidiaries unless the context otherwise requires.  NFC is a commercial financing organization that provides wholesale, retail and lease financing for products sold by Navistar, Inc. and its dealers within the United States.  NFC also finances wholesale accounts and selected retail accounts receivable of Navistar, Inc. and facilitates financing arrangements in other countries to support NIC’s global operations.





Revenue includes interest revenue from wholesale notes, retail notes, finance leases, retail accounts, wholesale accounts, secured and unsecured loans to affiliates, and rental income from operating leases. Cost of borrowing includes interest expense on debt financing and amortization of debt issuance costs and original issue discount.








Basis of Presentation and Consolidation





The accompanying consolidated financial statements include the assets, liabilities, revenues and expenses of Navistar Financial Corporation, its wholly-owned subsidiaries and variable interest entities (“VIE”) 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 generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for comprehensive annual financial statements. In our opinion all normal recurring adjustments necessary for a fair presentation are reflected in the consolidated financial statements. We have evaluated subsequent events and transactions for potential recognition or disclosure in the consolidated financial statements through March 8, 2019, the day our consolidated financial statements were available to be issued. Operating results for the three month period January 31, 2019 are not necessarily indicative of the results for the full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our audited consolidated financial statements for the year ended October 31, 2018 and should be read in conjunction with the disclosures therein.





We evaluate our performance and allocate resources based on a single segment concept.  Accordingly, there are no separately identified material operating segments for which discrete financial information is available.  We do not derive revenues from any single non-affiliate customer that represents 10% or more of our total revenues.





Certain prior period amounts have been reclassified to conform to current period presentation.





Estimates





The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates and assumptions are used for, but are not limited to vehicle inventory, net investment in operating leases, allowance for losses and income taxes. Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes.  Actual results could differ from the estimates we have used.




















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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Recently Adopted Accounting Standards





In November 2016, the Financial Accounting Standards Board (‘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. For public business entities, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. NFC is not considered a public business entity for purposes of its stand-alone consolidated financial statements. We retrospectively adopted this ASU effective November 1, 2018, concurrent with NIC. The prior period adjustment for the three month period ended January 31, 2018, reduced cash from investing activities by $51.9 million.





In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification Topic 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.  The 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. On July 9, 2015, the FASB deferred the effective date of this update for public business entities to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. We adopted this ASU effective November 1, 2018, concurrent with NIC. Adoption did not have a material impact on our consolidated financial statements.





In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities” (Subtopic 825-10).  This ASU amends the fair value measurement, impairment measurement, presentation, and related disclosures for certain financial instruments. For public business entities, this ASU is effective for annual and interim reporting periods beginning after December 15, 2017, and early adoption is permitted. We adopted this ASU effective November 1, 2018, concurrent with NIC. Adoption did not have a material impact on our consolidated financial statements.





Recently Issued Accounting Standards





In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The 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. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Our effective date is November 1, 2022, with early adoption permitted as of November 1, 2019.  We are currently evaluating the impact of the adoption of this ASU on our consolidated financial statements and expect to adopt concurrent with NIC.





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. For public business entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Our effective date is November 1, 2020. We expect to adopt this ASU in the first quarter of fiscal 2020 concurrent with NIC, on a modified retrospective basis, with the cumulative effect adjustment recognized into retained earnings as of November 1, 2019. We will continue to evaluate the impact of this ASU on our consolidated financial statements.





There was no other recently issued accounting guidance for which we expect a material impact on our consolidated financial statements. Additionally, there was no new accounting guidance adopted during the three months ended January 31 , 2019 that had a material impact on our consolidated financial statements.














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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





2. TRANSACTIONS WITH AFFILIATED COMPANIES





Wholesale Notes, Wholesale Accounts and Retail Accounts





In accordance with the agreements between NFC and Navistar, Inc. relating to financing of wholesale notes, wholesale accounts and retail accounts, NFC receives interest income from Navistar, Inc. at rates applied to the average outstanding balances.  In addition, NFC may receive fee income from Navistar, Inc. to adjust for other incremental borrowing costs.  The intercompany agreements are amended from time to time to reflect prevailing market rates and fees. Interest paid by dealers on wholesale notes, if any, plus the payments made by Navistar, Inc. for the typical “interest free” period offered to the dealers are the primary revenues received on wholesale notes.  Substantially all revenues earned on wholesale accounts and retail accounts are received from Navistar, Inc.  Wholesale notes, wholesale accounts and retail accounts purchased by NFC, primarily from Navistar, Inc., were as follows (in millions):


Three Months EndedJanuary 31,20192018Wholesale notes$1,185.2$802.9Wholesale and retail accounts950.1661.4Total$2,135.3$1,464.3








NFC finances eligible used truck inventory of Navistar, Inc. under a secured note which has been amended from time to time. The inventory advance rate is 65% and the interest rate on the secured note is the prime rate plus 5.25%. In June 2018, the secured note was amended to increase the maximum commitment to $170.0 million from $125.0 million and to increase the advance rate for certain used trucks to 85%.  The secured note matures in September 2021, as amended.  Interest income of less than $0.1 million was earned for both of the three months ended January 31 , 2019 and 2018 .  The interest income is recorded in Wholesale notes interest . The outstanding amount under the used truck inventory financing as of January 31 , 2019 and October 31, 2018 , was $40.0 million and zero, respectively, and is included in Finance receivables from affiliates .





Aggregate interest and fee revenue from Navistar, Inc. for the three months ended January 31 , 2019 and 2018 , was $21.3 million and $13.6 million, respectively.  The interest and fee revenues are included in Wholesale notes interest and Retail and wholesale accounts interest .








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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Finance Receivables, Operating Leases and Vehicle Inventory





Under certain circumstances Navistar, Inc. is contractually liable for losses on NFC’s finance receivables and investments in equipment on operating leases, including residual values, and may be required to repurchase the repossessed collateral at the receivable principal unpaid balance or share in the impairment losses or losses on sales of vehicle inventory with NFC.  The allocation of losses (gains) between Navistar, Inc. and NFC on vehicles financed by NFC was as follows (in millions):


Three Months EndedJanuary 31,20192018Net credit losses recorded by NFC$—$—Net credit losses recorded by Navistar, Inc.——Total net credit losses$—$—Impairment losses recorded by NFC$—$—Impairment losses recorded by Navistar, Inc.1.70.5Total impairment losses$1.7$0.5Net (gains) losses on sales recorded by NFC$(0.1)$—Net (gains) losses on sales recorded by Navistar, Inc.2.0(0.1)Total net (gains) losses on sales$1.9$(0.1)








Guarantee Fees and Servicing Revenue





NFC receives fees for its guarantee of revolving debt owed by Navistar Financial, S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad Regulada (“NFM”), a Mexican finance subsidiary of NIC.  Fee amounts are amended from time to time to reflect prevailing market rates and are based on outstanding balances.  These guarantee fees were less than $0.1 million and $0.3 million for the three months ended January 31,  2019 and 2018 , respectively, and are recorded in Other revenues .  Concurrently, NFC pays fees to NIC to provide a full backstop guarantee on all losses incurred as a result of NFC’s guarantee of NFM’s debt. Fees paid by NFC for this backstop guarantee for the three months ended January 31 , 2019 and 2018 were less than $0.1 million and $0.1 million, respectively, and are recorded in Credit, collections and administrative .  No losses have been incurred relating to the NFM guarantees. During 2018, NFC was released from all NFM revolving debt guarantees, however, NIC and NFC continue to jointly guarantee any borrowings made by NFM under the Mexican sub-revolver of the NFC bank credit facility. See Note 8, Commitments and Contingencies , for outstanding balances relating to these guarantees.





In April 2015, NFC and NFM entered into a fee agreement whereby NFM pays NFC an administrative fee to offset expenses incurred by NFC relating to accounts collection and servicing for certain export customers.  NFC recorded fees of $0.1 million and $0.1 million for the three months ended January 31 , 2019 and 2018 , respectively, in Other revenues .





Unsecured Loans to Affiliates





On April 1, 2011, NFC entered into a working capital loan agreement with NFM whereby NFC has agreed to lend an aggregate amount not to exceed $100.0 million (at a floating rate equal to the Eurodollar loan rate for each month as set forth in NFC’s bank credit facility).  The agreement renews annually but can be terminated by either party upon advance notice. Lending under this agreement is conditional and subject to a maximum of $20.0 million under the May 2016 bank credit facility, as amended. See Note 7, Senior and Secured Borrowings . There was no balance outstanding and no interest income on this loan during the three months ended January 31 , 2019 and 2018 .





In November 2011, NFC entered into a revolving loan agreement with International Truck and Engine Corporation Cayman Islands Holding Company, a subsidiary of NIC organized in the Cayman Islands (“Intercompany Loan”), which has been amended from





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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





time to time. In July 2018, NFC amended the Intercompany Loan, whereby NFC has agreed to lend up to $200.0 million for general corporate purposes. The amended maturity date is September 2021. In December 2018, the interest rate was amended to LIBOR plus 625 basis points from LIBOR plus 900 basis points. As of January 31,  2019 , and October 31, 2018 , the outstanding balance was $200.0 million and $150.0 million, respectively.  Interest income related to this loan of $4.3 million and zero was recorded in Other revenues for the three months ended January 31,  2019 and 2018 , respectively. There was no outstanding balance during the three months ended January 31, 2018.





Support Agreement





As a condition to certain NFC lending agreements, Navistar, Inc. will not permit NFC’s ratio of the sum of consolidated pre-tax income, consolidated interest expense and capital contributions from Navistar, Inc. to consolidated interest expense (“Fixed Charge Coverage Ratio”) to be less than 125% on the last day of any fiscal quarter for the period of four consecutive fiscal quarters then ended.  There were no required contributions under the support agreements during the three months ended January 31 , 2019 and 2018 .  Additionally, certain NFC lending agreements limit the amount of dividends NFC can pay to Navistar, Inc.





Shareowner’s Equity





NFC did not pay dividends to Navistar, Inc. during the three months ended January 31,  2019 or 2018 .





Net Accounts Due to Affiliates





Net accounts due to affiliates represents the balance of other payables and receivables related to operations, such as Navistar, Inc. dealer credits for parts returns and warranty, and monthly finance fees charged to Navistar, Inc.





Defined Benefit Plans





We provide postretirement benefits to some of our employees and retirees through qualified and non-qualified plans sponsored by NIC.  Costs associated with postretirement benefits include pension and postretirement healthcare expenses for employees, retirees, and surviving spouses and dependents. Generally, the pension plans are non-contributory.  NIC’s policy is to fund the pension plans in accordance with applicable United States government regulations. As of January 31 , 2019 , all legal funding requirements have been met.





The postretirement benefits expense recorded in Credit, collections and administrative for pension and healthcare was $0.8 million and $0.6 million for the three months ended January 31 , 2019 and 2018 , respectively.  Contributions made to these plans correspond to the postretirement benefit expense recorded.





Defined Contribution Plans





Our defined contribution plans cover a substantial portion of employees.  The defined contribution plans contain a 401(k) feature and provide a company matching contribution.  Many participants covered by the plans also receive annual company contributions to their retirement account based on an age-weighted percentage of the participant’s eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $0.1 million and $0.1 million for the three months ended January 31 , 2019 and 2018 , respectively, and is recorded in Credit, collections and administrative .





Allocated Corporate Expenses





We are charged a proportionate share of certain corporate expenses of NIC primarily for building space and IT services.  These expenses were $1.1 million and $1.0 million for the three months ended January 31 , 2019 and 2018 , respectively, and are included in Credit, collections and administrative .




















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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








3. FINANCE RECEIVABLES





Our primary business is to provide wholesale, retail and lease financing for new and used trucks sold by Navistar, Inc. and Navistar, Inc.’s dealers, and as a result, our receivables and leases have significant concentration in the truck industry.  On a geographic basis, there is not a disproportionate concentration of credit risk in any region of the United States and we perform regular credit evaluations of our dealers and customers.  We retain as collateral an ownership interest in the equipment associated with leases and, on behalf of ourselves and the various trusts, we maintain a security interest in the equipment associated with wholesale notes and retail notes.  As of January 31 , 2019 and October 31, 2018 , no single customer represented a significant concentration of credit risk.





Finance receivables balances are summarized as follows (in millions):


January 31,October 31,20192018Wholesale notes$1,107.8$1,103.2Retail notes, net of unearned income25.024.7Finance leases, net of unearned income12.113.1Accounts (includes retail and wholesale)431.0423.8Finance receivables from affiliates, net of unearned income40.0—Total finance receivables1,615.91,564.8Allowance for losses(1.6)(1.6)Total finance receivables, net$1,614.3$1,563.2











4. ALLOWANCE FOR LOSSES





We have determined there are two portfolio segments of finance receivables based on the type of financing inherent to each segment.  The retail portfolio segment consists of loans or leases to end-users for the purchase or lease of vehicles.  The wholesale portfolio segment consists of loans to dealers to finance their vehicle inventory, service parts and other accounts.  As the initial measurement attributes, assessment of credit risk, and monitoring of the performance of the receivables are consistent within each portfolio, we have determined that each portfolio consists of one class of receivable.











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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





The activity related to our Allowance for losses for finance receivables for the three months ended January 31 is summarized as follows (in millions):


Retail portfolio20192018Allowance for losses, beginning of period$0.1$0.1Provision for (recovery of) credit losses——Net recoveries (charge-offs)——Allowance for losses, end of period$0.1$0.1Wholesale portfolio20192018Allowance for losses, beginning of period$1.5$1.5Provision for (recovery of) credit losses——Net recoveries (charge-offs)——Allowance for losses, end of period$1.5$1.5Total20192018Allowance for losses, beginning of period$1.6$1.6Provision for (recovery of) credit losses——Net recoveries (charge-offs)——Allowance for losses, end of period$1.6$1.6





The accrual of interest income from non-affiliates is discontinued on impaired loans that are 90 days or more past due resulting from credit related reasons.  Impaired finance receivables include those with specific loss reserves and certain other accounts that are on non-accrual status.  In certain cases, we continue to collect payments on our impaired finance receivables.


The following table sets forth information regarding impaired finance receivables as follows (in millions):


January 31, 2019Retail PortfolioWholesale PortfolioTotalImpaired finance receivables with specific loss reserves$—$—$—Impaired finance receivables without specific loss reserves———Specific loss reserves on impaired finance receivables———Finance receivables on non-accrual status———


October 31, 2018Retail PortfolioWholesale PortfolioTotalImpaired finance receivables with specific loss reserves$—$—$—Impaired finance receivables without specific loss reserves0.5—0.5Specific loss reserves on impaired finance receivables———Finance receivables on non-accrual status0.5—0.5





The allocation of specific loss reserves between NFC and Navistar, Inc. was as follows (in millions):


January 31,October 31,20192018Specific loss reserves on impaired receivables recorded by NFC$—$—Specific loss reserves recorded by Navistar, Inc.——Total$—$—











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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





The average balance of impaired finance receivables was $0.2 million and $0.1 million for the three months ended January 31 , 2019 and 2018 , respectively.





The age analysis is used as the credit quality indicator for finance receivables. Finance receivables with installments less than 30 days outstanding are considered current. Past due amounts reflect the total exposure by contract or customer, depending on the type of receivable.  The age analysis is summarized as follows (in millions):


January 31, 2019Retail PortfolioWholesale PortfolioTotalCurrent$279.2$1,325.3$1,604.530-90 days past due10.40.510.9Over 90 days past due0.40.10.5Total finance receivables$290.0$1,325.9$1,615.9





October 31, 2018Retail PortfolioWholesale PortfolioTotalCurrent$290.1$1,262.8$1,552.930-90 days past due10.60.611.2Over 90 days past due0.50.20.7Total finance receivables$301.2$1,263.6$1,564.8








Certain finance receivables in our retail portfolio segment have been restructured at below market interest rates pursuant to court order and thereby meet the definition of a troubled debt restructuring. As of January 31,  2019 and October 31, 2018 , the balance of such restructurings was less than $0.1 million and less than $0.1 million, respectively.  NFC has no commitment to lend additional funds to these customers.











5. NET INVESTMENT IN OPERATING LEASES





Net investment in operating leases is summarized as follows (in millions):


January 31,October 31,20192018Investment in equipment under operating leases$265.2$255.6Less: Accumulated depreciation(94.6)(92.6)Net investment in equipment under operating leases170.6163.0Deferred and receivable rents, net of reserve6.73.8Net investment in operating leases$177.3$166.8





Deferred and receivable rents, net of reserve includes $0.1 million and $0.7 million of reserves for rents past due over 90 days as of January 31 , 2019 and October 31, 2018 , respectively.





Operating leases are tested for impairment whenever circumstances indicate that the carrying value of a lease or group of leases may not be recoverable. If the sum of the estimated undiscounted future cash flows is less than carrying value, then an impairment is recorded for the amount by which carrying value exceeds fair value.  Impairments for the three months ended January 31,  2019 and 2018 were $1.5 million and $0.3 million, respectively. The impairments reduced Investment in equipment under operating leases and were charged to Navistar, Inc. See Note 10, Fair value measurements , for the fair value of impaired operating leases.











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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








6. INCOME TAXES





We compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense.  Ordinary income refers to income from continuing operations before income tax expense excluding significant unusual or infrequently occurring items.  The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs.  Items included in Income tax expense in the periods in which they occur include the cumulative effect of changes in tax laws or rates, adjustments to uncertain tax positions, and adjustments to our valuation allowance following a change in judgment concerning the realizability of deferred tax assets in future years.





NFC and its subsidiaries are included in NIC’s consolidated federal income tax returns.  Certain state income tax returns are required to be filed on a separate basis and others are included in various combined reports.  In accordance with its intercompany tax sharing agreement with NIC, all federal income tax liabilities or credits are determined by NFC and its subsidiaries as if NFC filed its own consolidated return.  Income tax expense includes federal, state and foreign income taxes.








As a part of NIC’s consolidated federal income tax returns, we participate in the Compliance Assurance Process, and as such, we have undergone a U.S. federal tax examination and received acceptance letters from the Internal Revenue Service (“IRS”) through October 31, 2017. The possibility of the IRS opening up a closed tax year for additional audit is remote. Also, as a part of NIC or as a separate filing entity, we are subject to examination in various state and foreign jurisdictions over various periods.  In connection with examinations 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.  We believe we have sufficient accruals for our contingent liabilities.





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 and October 31, 2018 , the amount of liability, excluding interest and penalties, for uncertain tax positions was $4.4 million and $4.4 million, respectively.  If the unrecognized tax benefits are recognized, all would impact our effective tax rate. While it is probable that the liability for uncertain tax positions may change during the next twelve months, we do not believe that such change would have a material impact on our financial condition, results of operations, or cash flows.





On December 22, 2017, The Tax Cuts and Jobs Act (the “Tax Act”) was signed into U.S. law. The Tax Act reduced the statutory corporate income tax rate from 35% to 21%, effective January 1, 2018. This rate reduction also required NFC to remeasure its deferred taxes as of the date the Tax Act was enacted.  NFC’s U.S. deferred tax liabilities, net of deferred tax assets, were remeasured and decreased by $1.4 million with a corresponding decrease to Income tax expense during the three month period ended January 31, 2018. 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. Our analyses performed to date are sufficient to calculate a reasonable estimate of the impacts of the Tax Act.











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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





7. SENIOR AND SECURED BORROWINGS





Senior and secured borrowings , net of certain issuance costs,  are summarized as follows (in millions):


Weighted AverageInterest RateJanuary 31,October 31,January 31,October 31,2019201820192018Bank credit facility at variable rates, due September 2021$164.0$21.07.5%7.2%Term loan, due July 2025, net of issuance costs of $3.9 million and $4.1 million, respectively, and discount of $1.9 million and $1.9 million, respectively393.2394.06.3%6.2%Borrowings secured by wholesale note asset-backedsecurities at rates currently between 3.1% and 4.8%, due at various dates through September 2020 , net of issuance costs of $2.4 million and $3.0 million, respectively872.6817.03.4%3.2%Borrowings secured by operating and finance leases due serially through January 2024 at rates currently between 3.3% and 4.7%88.6105.43.8%3.8%Borrowings secured by retail accounts at a variable rate, matures January 202092.7100.03.5%3.3%Total senior and secured borrowings$1,611.1$1,437.44.6%4.1%








Borrowings secured by wholesale note asset-backed securities include amounts drawn on the variable funding notes (“VFN”) facility of Navistar Financial Securities Corporation (“NFSC”) of $325.0 million and $270.0 million as of January 31 , 2019 and October 31, 2018 , respectively. In November 2018, the maturity of the VFN facility was extended from December 2018 to May 2020.





International Truck Leasing Corporation (“ITLC”) received lease funding proceeds of zero and $16.2 million during the three months ended January 31 , 2019 and 2018 , respectively.





In December 2018, the Truck Retail Accounts Corporation ("TRAC") funding facility maturity was extended to January 2020.











8. COMMITMENTS AND CONTINGENCIES








NFC periodically guarantees the outstanding debt of certain affiliates.  The guarantees allow for diversification of funding sources.  NFC did not have any guarantee exposure to this outstanding debt as of January 31 , 2019 and October 31, 2018 .  During 2018, NFC was released from all NFM revolving debt guarantees, however, NIC and NFC continue to jointly guarantee any borrowings made by NFM under the Mexican sub-revolver of the NFC bank credit facility. There were no Mexican sub-revolver borrowings as of January 31,  2019 and October 31, 2018 . See Note 2, Transactions with Affiliated Companies for fees recorded by NFC relating to these guarantees.

















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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





9. SECURITIZATION TRANSACTIONS





NFC typically sells its finance receivables to its various wholly-owned special purpose entities (“SPEs”) in order to fund the financing requirements of Navistar, Inc.’s dealers and customers.  NFC continues to service the receivables thereafter.  In accordance with current accounting guidance , all of these transactions qualify as secured borrowings whereby the receivables transferred and the debt issued are recorded on NFC’s consolidated balance sheets, and we record the related interest revenue earned on the finance receivables and the interest expense paid on the secured borrowings.





The SPEs’ assets are available to satisfy their creditors’ claims prior to such assets becoming available for the SPEs’ own uses or to NFC or affiliated companies.  NFC is under no obligation to repurchase any sold receivable that becomes delinquent in payment or otherwise is in default.  As seller and servicer of the finance receivables, NFC is obligated to provide certain representations and warranties regarding the receivables. Should any receivables fail to meet these representations and warranties, NFC is required to repurchase the affected receivables. These secured borrowings are payable solely out of collections on the finance receivables, operating leases and other assets transferred to those subsidiaries.  The asset-backed debt is the legal obligation of the SPEs whereby there is generally no additional recourse to NFC.  The terms of receivable sales generally require NFC to provide credit enhancements in the form of receivables over-collateralization and/or cash reserves.  The use of such cash reserves by NFC is restricted under the terms of the securitized sales agreements.





Variable interest entities





Asset-backed securities are issued by our SPE NFSC through a wholesale note owner trust.  We consolidate the trust as a VIE since we remain the primary beneficiary of the trust’s assets and liabilities which include the sold receivables and the secured borrowings.  There was no change in the determination to consolidate any other entities during the three months ended January 31 , 2019 , and we have not provided any financial or other support that we were not contractually obligated to provide.





Other securitizations





Other SPEs transfer certain receivables, leases and other financial assets directly to investors, in order to secure borrowings.





The following table sets forth the carrying amount of transferred financial assets and (liabilities) of the consolidated VIEs and other securitizations (in millions):


January 31, 2019ConsolidatedVIEOtherSecuritizationsTotalFinance receivables, net$986.2$231.3$1,217.5Net investment in operating leases—79.979.9Restricted cash and cash equivalents46.556.9103.4Secured borrowings(875.0)(181.3)(1,056.3)


October 31, 2018ConsolidatedVIEOtherSecuritizationsTotalFinance receivables, net$948.8$241.8$1,190.6Net investment in operating leases—89.889.8Restricted cash and cash equivalents28.945.174.0Secured borrowings(820.0)(205.4)(1,025.4)














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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





10. FAIR VALUE MEASUREMENTS





In accordance with current accounting guidance, we use a three-level valuation hierarchy of fair value measurements based upon the reliability of observable and unobservable inputs used in valuations of fair value.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.  The use of observable and unobservable inputs result in the following fair value hierarchy of fair value measurements:





lLevel 1 - based upon quoted prices foridenticalinstruments in active markets;lLevel 2 - based upon quoted prices forsimilarinstruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose significant inputs are observable: andlLevel 3 - based upon one or more significant unobservable input





The following section describes the valuation methodologies used to measure fair value, key inputs and significant assumptions:





Retail Notes . The fair values of retail notes are estimated by discounting the future contractual cash flows using the interest rates and credit spreads currently being offered for notes with similar terms.





Finance Receivables from Affiliates . Finance receivables from affiliates may include retail notes, wholesale notes and wholesale accounts for which fair values are estimated separately as described in the respective category.





Senior and Secured Borrowings . The fair values of Senior and Secured Borrowings are estimated by discounting the future contractual cash flows using an estimated discount rate reflecting interest rates and credit spreads currently being offered for debt with similar terms since there is no public market for this debt.





Cash and Cash Equivalents , Wholesale Notes, Accounts (Wholesale and Retail) , Restricted Cash and Cash Equivalents , and Net Accounts Due to Affiliates . The estimated fair values of these financial instruments approximate the respective carrying values as a result of their short-term maturity, variable interest rates or highly liquid nature and are categorized within Level 1 of the hierarchy.








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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





The following table presents the carrying values and estimated fair values of our financial instruments for which fair value does not approximate the respective carrying value (in millions):


CarryingValueFair ValueJanuary 31, 2019TotalLevel 1Level 2Level 3Financial assets:Retail notes$25.0$24.6$—$—$24.6Financial liabilities:Senior and secured borrowings (net of unamortized debt issue costs and discount)1,611.11,612.5——1,612.5CarryingValueFair ValueOctober 31, 2018TotalLevel 1Level 2Level 3Financial assets:Retail notes$24.7$24.0$—$—$24.0Financial liabilities:Senior and secured borrowings (net of unamortized debt issue costs and discount)1,437.41,446.2——1,446.2








As of January 31 , 2019 and October 31, 2018 , NFC held no financial instruments that were measured at fair value on a recurring basis.





There were no transfers of financial instruments between fair value hierarchy levels during the three months ended January 31 , 2019 or 2018 .





The following table presents assets that are measured at fair value on a nonrecurring basis (in millions):


January 31,October 31,20192018Impaired net investment in operating leases$14.9$13.3Vehicle inventory1.14.9





The fair value of impaired net investment in operating leases is determined by discounting the future expected cash flows including the fair value of underlying leased vehicles. The fair value of vehicles for both operating leases and vehicle inventory is determined using dealer vehicle value publications, adjusted for certain market factors, which are Level 2 inputs.











11. LEGAL PROCEEDINGS





We are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings, which constitute ordinary, routine litigation incidental to our business.  In our opinion, the disposition of these proceedings and claims will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.





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Management’s Discussion and Analysis of Financial Condition and Results of Operations








Forward-Looking Statements





Information provided and statements contained in this report that are not purely historical are forward-looking statements.  You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Such forward-looking statements only speak as of the date of this report and NFC assumes no obligation to update the information included in this report.  Such forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy.  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, many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.





Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide information that is supplemental to, and should be read together with the consolidated financial statements and the accompanying notes presented herein. The information contained herein is intended to assist the reader in obtaining an understanding of our consolidated financial statements, the changes in certain key items in those financial statements during the period reported, the primary factors that accounted for those changes, any known trends or uncertainties that we are aware of that may have a material impact on our future performance, as well as how certain accounting principles affect our consolidated financial statements.








Overview





NFC provides financing for products sold by Navistar, Inc. and its dealers within the United States and earns interest revenue from wholesale notes, retail notes, finance leases, retail accounts, wholesale accounts, secured and unsecured loans to affiliates, and rental income from operating leases.  Our cost of borrowing includes interest expense on debt financing and debt issuance costs on bank credit facilities, asset-backed securities and other secured funding facilities.





Financing revenue increased during the first quarter of fiscal 2019 compared to 2018 primarily as a result of higher average portfolio balances, higher interest rates and interest income on the intercompany revolving loan balance with International Truck and Engine Corporation Cayman Islands Holding Company, a subsidiary of NIC organized in the Cayman Islands (“Intercompany Loan”). Our cost of borrowing increased primarily as a result of higher interest rates and higher average funding levels required for higher average portfolio balances, partially offset by improvements to our funding strategy.





In November 2018, the maturity of the variable funding notes (“VFN”) facility was extended from December 2018 to May 2020.





In December 2018, the $100.0 million Truck Retail Accounts Corporation (“TRAC”) funding facility was extended from January 2019 to January 2020.





In December 2018, NFC increased the Intercompany Loan from $150.0 million to $200.0 million. Also in December 2018, the interest rate was amended to LIBOR plus 625 basis points from LIBOR plus 900 basis points.











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Consolidated Comparison of Business Results





The following table summarizes our consolidated statements of operations and illustrates the key financial indicators used to assess the consolidated financial results.  Financial information is presented for the three months ended January 31 (in millions):


20192018Change% ChangeRevenuesFinancing revenue$30.6$19.9$10.753.8Operating leases and other revenues19.011.57.565.2Total revenues49.631.418.258.0ExpensesCost of borrowing14.39.54.850.5Credit, collections and administrative4.74.50.24.4Provision for (recovery of) credit losses———N.M.Depreciation on operating leases10.18.21.923.2Other (income) expenses, net(0.8)—(0.8)N.M.Total expenses28.322.26.127.5Income before taxes21.39.212.1131.5Income tax expense4.91.23.7308.3Net income$16.4$8.0$8.4105.0





Financing revenue is comprised of interest revenue from the following interest earning assets (in millions):


20192018Change% ChangeWholesale notes$23.0$14.6$8.457.5Retail notes and finance leases0.70.60.116.7Retail and wholesale accounts6.94.72.246.8Total financing revenue$30.6$19.9$10.753.8





Percentage changes deemed not meaningful are designated N.M.








Three month period ended January 31 , 2019 compared to the three month period ended January 31 , 2018





Financing revenue increased primarily as a result of higher average portfolio balances as well as higher overall interest rates. The average overall finance receivable portfolio balance increased from $1.1 billion to $1.5 billion .  The average interest rate of the finance receivables portfolio was 8.1% and 7.2% for 2019 and 2018 , respectively.





Operating leases and other revenues includes rental income on operating leases, interest earned on restricted cash collateral and guarantee fees.  These revenues increased from $11.5 million to $19.0 million primarily as a result of the interest income on the Intercompany Loan and a higher average investment in equipment under operating leases.





Cost of borrowing primarily includes interest expense on Senior and secured borrowings . Cost of borrowing increased from $9.5 million to $14.3 million as a result of higher funding requirements for higher average finance receivables balances, and higher interest rates, partially offset by improvements to our funding strategy. The gross average outstanding debt balance increased from $925.2 million to $1.1 billion .  Our average interest rates on Senior and secured borrowings were 4.6% and 3.1% for the respective periods in 2019 and 2018 .





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Credit, collections and administrative expenses include costs relating to the management and servicing of receivables as well as general business expenses and wages, and were generally comparable to the prior year.





Income tax expense includes federal, state and foreign taxes. Our income tax expense increased as a result of the prior year decline in current and deferred income taxes attributed to the The Tax Cuts and Jobs Act (the “Tax Act”), and higher pretax income in the current year.














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Financial Condition (in millions):


As ofJanuary 31, 2019October 31, 2018Change% ChangeCash and cash equivalents$19.5$22.7$(3.2)(14.1)Finance receivables, net1,614.31,563.251.13.3Unsecured loans to affiliates200.0150.050.033.3Net investment in operating leases177.3166.810.56.3Restricted cash and cash equivalents103.474.029.439.7Vehicle inventory1.14.9(3.8)(77.6)Other assets6.85.41.425.9Total assets$2,122.4$1,987.0$135.46.8Net accounts due to affiliates$99.5$156.4$(56.9)(36.4)Senior and secured borrowings1,611.11,437.4173.712.1Other liabilities43.441.22.25.3Total liabilities1,754.01,635.0119.07.3Total shareowner’sequity368.4352.016.44.7Total liabilities and shareowner’s equity$2,122.4$1,987.0$135.46.8








Balances as of January 31 , 2019 compared to balances as of October 31, 2018





Finance receivables, net  increased  $51.1 million .  Wholesale notes increased $4.6 million reflecting an increase in dealer inventory levels.  Retail notes and finance leases, net of unearned income, decreased by $0.7 million as a result of net collections during the period.  Accounts balances increased by $7.2 million , primarily related to retail fleet receivables. Finance receivables from affiliates increased by $40.0 million related to the used truck secured note with Navistar, Inc. Allowance for losses was unchanged.





Unsecured loans to affiliates increased as a result of the additional Intercompany Loan advance of $50.0 million in December, 2018.





Restricted cash and cash equivalents  increased from $74.0 million to $103.4 million . The increase primarily relates to collection account balances on secured borrowings.





Vehicle inventory decreased from $4.9 million to $1.1 million primarily as a result of sales of off-lease vehicles exceeding additions by $3.8 million.





Other assets increased from $5.4 million to $6.8 million primarily as a result of capital expenditures related to IT systems.





Net accounts due to affiliates decreased from $156.4 million to $99.5 million primarily relating to a reduction in the trade payable with Navistar, Inc.





Senior and secured borrowings increased by $173.7 million primarily as a result of higher funding requirements for finance receivables, the additional Intercompany Loan, and a reduction in the trade payable with Navistar, Inc.





Other liabilities increased from $41.2 million to $43.4 million primarily as a result of the first quarter income tax liability, partially offset by a reduction in accrued dealer credits.








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Shareowner’s equity increased from $352.0 million to $368.4 million as a result of net income of $16.4 million .








Asset Quality





The following table summarizes delinquencies as a percentage of finance receivables: January 31,October 31,20192018ChangeDelinquenciesRetail notes and finance leases greater than 60 days.0.6%1.1%(0.5)%Wholesale notes greater than 60 days—%—%—%Wholesale accounts greater than 60 days0.1%0.2%(0.1)%Allowance to finance receivables coverage ratio0.1%0.1%—%








At the current retail portfolio level, the ratio of retail notes and finance leases delinquencies greater than 60 days can fluctuate significantly as a result of the performance of any one customer. The fair value of vehicles repossessed for the three months ended January 31 , 2019 and 2018 , was $0.2 million and $0.5 million, respectively. Wholesale accounts delinquencies can relate to specific customer balances for which Navistar, Inc. has recorded reserves. These delinquencies do not typically reflect a default risk for NFC.





The allowance to finance receivables coverage ratio shown above remained constant as the primary component for wholesale finance receivables was unchanged.  The average impaired receivables as a percentage of average finance receivables were less  than 0.1% for both of the three month periods ended January 31 , 2019 and 2018 , respectively.





The allocation of the Allowance for losses by portfolio segment is as follows (in millions):


January 31,October 31,20192018Retail portfolio$0.1$0.1Wholesale portfolio1.51.5Total$1.6$1.6





NFC evaluates its Allowance for losses based on a pool method for two portfolio segments: retail finance receivables and wholesale finance receivables.  The estimate of the retail portfolio allowance is based upon three factors:  a historical component based upon a weighted average of actual loss experience from the most recent 12 quarters, a specific reserve component, and a qualitative component if we determine that current economic and portfolio quality trends indicate that the historical component may not reflect the appropriate risk. For the wholesale portfolio, an allowance for losses is established using the average loss per occurrence, based on historical losses.





When we identify significant customers as a probable risk of default, we segregate those customers’ receivables from the pool and separately establish a specific reserve based on the market value of the collateral and specific terms of the receivable contracts.  We use the same process in estimating the collateral values as we do in estimating the values of our vehicle inventory.








Financing Environment





Financing Volume and Finance Market Share





Wholesale notes purchased by NFC were $1.2 billion and $802.9 million for the three months ended January 31 , 2019 and 2018 , respectively.  NFC provides wholesale financing for 100% of new truck inventory sold to Navistar, Inc.’s dealers and distributors





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through the customary free interest period offered by Navistar, Inc. As of January 31 , 2019 and October 31, 2018 , NFC retained floor plan financing for approximately 74% and 74%, respectively, of the dealers, after the free interest period.





Serviced wholesale notes balances, including the used truck financing, were $1.1 billion and $1.1 billion as of January 31 , 2019 and October 31, 2018 , respectively.





NFC’s net retail notes and finance lease originations were $2.4 million and $7.2 million for the three months ended January 31 , 2019 and 2018 , respectively.





Operating lease originations were $23.0 million and $35.4 million for the three months ended January 31,  2019 and 2018 , respectively.





Funds Management





We have traditionally obtained the funds to provide financing to Navistar, Inc.’s dealers and retail customers from the financing of receivables in securitization transactions, bank credit facilities, and other secured funding facilities.  Given our debt ratings and the overall quality of our receivables, the financing of receivables in securitizations has been the most economical source of funding.





Credit Ratings





NFC’s credit ratings were as follows:


As of January 31, 2019As of October 31, 2018FitchStandard& Poor’sFitchStandard& Poor’sB-BB-B-Outlook PositiveOutlook StableOutlook PositiveOutlook Positive








Funding Trends





Benchmark interest rates have increased since the first quarter of fiscal 2018. Increased equity or credit market volatility, or tightening of monetary policy by the US Federal Reserve, may increase borrowing rates on our variable rate debt. Credit spreads of our new and amended funding facilities have decreased following NIC’s strategic alliance with TRATON AG (formerly Volkswagen Truck & Bus AG) and certain of its subsidiaries and affiliates, and as a result of NIC’s improved financial performance. This is evidenced by the improved credit spreads on the amendment and extension of the revolving portion of our bank credit facility in September 2017, our VFN facility renewal in November 2018, and the TRAC facility renewal in December 2018. Our borrowing costs can also be impacted by changes in credit rating agency assessments of our debt or the debt of NIC. Our ability to obtain financing at competitive rates depends substantially on the funding opportunities available.











Funding Facilities





NFC initially funds finance receivables using its bank credit facility.  In September 2017, the revolving portion of the bank credit facility was amended and extended to a maturity date of September 2021, with the facility maximum amount reduced from $274.7 million to $269.2 million effective in June 2018. In June 2018, and in accordance with the terms of the bank credit facility, the term loan portion of the facility was paid in full. In June 2018, certain leverage covenants and baskets under the bank credit facility were amended to allow for the larger term loan facility which was completed in July 2018.




















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The availability under the revolver portion of the bank credit facility was as follows (in millions):


January 31,October 31,20192018Revolver bank loan$269.2$269.2NFC revolving loan utilized(164.0)(21.0)Mexican sub-revolver loan utilized——Total availability$105.2$248.2








In July 2018, NFC entered into a $400.0 million senior secured term loan B facility (“NFC Term Loan”). The NFC Term Loan is secured by a first-priority security interest in certain assets of NFC and ranks equal to that of NFC’s bank credit facility. The initial funding interest rate was LIBOR plus a margin of 3.75%. NFC has the option to use a defined alternate base rate. Debt issuance costs and the original issuance discount of $4.2 million and $2.0 million, respectively, were recorded as a direct deduction from the carrying amount and will amortize through Cost of borrowing - Other over the life of the loan. The NFC Term Loan requires quarterly principal amortization payments of $1.0 million, with the balance due at maturity. The proceeds were used to pay certain fees and expenses in connection with the NFC Term Loan and to initially fund the Intercompany Loan for $150.0 million. The remainder of the proceeds were used for other general corporate purposes.





We finance certain receivables through securitizations utilizing the asset-backed public market and private placement sales.  NFC, through these securitizations, has been able to fund its operating needs at rates which are more economical than those available to NFC in the public unsecured bond market.  In a typical securitization transaction, NFC transfers a pool of finance receivables to a bankruptcy-remote, wholly-owned special purpose subsidiary.  The special purpose subsidiary then transfers the receivables to a legally isolated entity, generally a trust, in exchange for cash from the sale of asset-backed securities to investors.  The securities issued by the trust are secured by future collections on the receivables transferred to the trust.  These transactions are structured as sales from a legal standpoint but are treated as on-balance sheet secured borrowings according to current accounting guidance.  Navistar Financial Securities Corporation (“NFSC”) finances wholesale notes through a wholesale note owner trust.





We use other bankruptcy-remote, wholly-owned special purpose subsidiaries for secured borrowings on other types of assets whereby an interest in the assets is purchased directly by the lender without the use of a trust.  ITLC finances operating leases and certain finance leases, and TRAC finances retail accounts.





NFC securitizes wholesale notes through NFSC, which has in place a wholesale note trust that provides for the funding of eligible wholesale notes.  Components of available wholesale note trust funding facilities were as follows (in millions):


Terminationor MaturityJanuary 31, 2019October 31, 2018Variable funding notesMay 2020$350.0$350.0Investor notesJune 2019250.0250.0Investor notesSeptember 2020300.0300.0Total funding capacity900.0900.0Funding utilized(875.0)(820.0)Total availability$25.0$80.0





In December 2017, the maturity of the VFN facility was extended from May 2018 to December 2018, and the facility capacity was reduced from $425.0 million to $350.0 million.  In November 2018, the maturity of the VFN facility was extended from December 2018 to May 2020.





In September 2018, NFSC completed the sale of $300.0 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $300.0 million of investor notes that matured in September 2018.








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ITLC provides for the funding of certain leases. ITLC received new lease funding proceeds of zero and $16.2 million during the three months ended January 31 , 2019 and 2018 , respectively.  As of January 31 , 2019 , the balance of ITLC’s collateralized borrowings secured by operating and finance leases was $88.6 million compared to $105.4 million as of October 31, 2018 .





The $100.0 million TRAC facility provides funding for certain retail accounts. As of January 31 , 2019 and October 31, 2018 , the amount borrowed under this facility was $92.7 million and $100.0 million, respectively. In January 2018, the TRAC funding facility maturity was extended from April 2018 to January 2019. In December 2018, the facility was extended to January 2020.








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