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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended January 31, 2004 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 1-4146-1   NAVISTAR FINANCIAL CORPORATION  Delaware
    
    36-2472404(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)2850 West Golf Road Rolling Meadows, Illinois
    
    60008(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number including area code 847-734-4000 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 and (2) has been subject to such
filing requirements for the past 90 days Yes  x    No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes  x    No o APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes  o    No o APPLICABLE ONLY TO CORPORATE ISSUERS: As of February 29, 2004, the number of shares outstanding of the
registrants common stock was 1,600,000. THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF INTERNATIONAL TRUCK AND ENGINE
CORPORATION, WHICH IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL
CORPORATION, AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1)
(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Statements of Consolidated Income and Retained Earnings 
Quarter Ended January 31, 2004 and 2003
    
    
    2Statements of Consolidated Financial Condition 
January 31, 2004; October 31, 2003; and January 31, 2003
    
    
    3Statements of Consolidated Cash Flow 
Quarter Ended January 31, 2004 and 2003
    
    
    4Notes to Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Results
of Operations and Financial Condition
    
    
    12Item 4.
    
    Controls and Procedures
    
    
    18PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    19Item 5.
    
    Other Information
    
    
    19Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    19Signature
    
    
    
    
    20ArticlesAmendmentAmendmentInstrumentsMaterial ContractsCEO CertificationCFO CertificationCertifications
  1




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Part I  Financial Information 
 Item 1. Financial Statements 
 Navistar Financial Corporation and Subsidiaries Statements of Consolidated Income and Retained Earnings (Unaudited) Quarter EndedJanuary
    
    JanuaryMillions of Dollars
    
    2004
    
    2003RevenuesRetail Notes and Finance Leases
    
    $
    10.8
    
    
    $
    9.8Income Related to Sales of Finance Receivables
    
    
    3.3
    
    
    
    38.8Operating Leases
    
    
    13.6
    
    
    
    17.9Wholesale Notes
    
    
    7.4
    
    
    
    7.5Accounts
    
    
    4.8
    
    
    
    4.3Servicing Fees
    
    
    6.4
    
    
    
    6.2Other Revenue
    
    
    1.2
    
    
    
    1.8Total
    
    
    47.5
    
    
    
    86.3ExpensesCost of BorrowingInterest Expense
    
    
    11.7
    
    
    
    13.5Other
    
    
    2.0
    
    
    
    1.8Credit, Collection and Administrative
    
    
    9.1
    
    
    
    10.1Provision for Credit Losses
    
    
    1.1
    
    
    
    4.2Depreciation on Operating Leases
    
    
    10.4
    
    
    
    12.7Other Expense
    
    
    0.5
    
    
    
    2.0Total
    
    
    34.8
    
    
    
    44.3Income Before Taxes
    
    
    12.7
    
    
    
    42.0Income Tax Expense
    
    
    4.8
    
    
    
    15.1Net Income
    
    
    7.9
    
    
    
    26.9Retained EarningsBeginning of Period
    
    
    204.6
    
    
    
    197.1Dividends Paid
    
    
    
    
    
    
    (5.0
    )End of Period
    
    $
    212.5
    
    
    $
    219.0
 See Notes to Consolidated Financial Statements. 2




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Navistar Financial Corporation and Subsidiaries Statements of Consolidated Financial Condition (Unaudited)
    
    
    
    
    
    (Unaudited)January 31,
    
    October 31,
    
    January 31,Millions of Dollars
    
    2004
    
    2003
    
    2003ASSETSCash and Cash Equivalents
    
    $
    0.7
    
    
    $
    
    
    
    $
    22.9Finance Receivables
Finance Receivables Held for Sale
    
    
    623.7
    
    
    
    519.9
    
    
    
    444.9Other Finance Receivables
    
    
    462.0
    
    
    
    347.3
    
    
    
    288.6Allowance for Losses
    
    
    (12.2
    )
    
    
    (12.9
    )
    
    
    (13.4
    )Finance Receivables, net
    
    
    1,073.5
    
    
    
    854.3
    
    
    
    720.1Net Accounts Receivable from Affiliates
    
    
    
    
    
    
    
    
    
    
    3.8Amounts Due from Sales of Receivables
    
    
    351.9
    
    
    
    368.9
    
    
    
    383.8Net Investment in Operating Leases
    
    
    182.0
    
    
    
    191.1
    
    
    
    226.2Restricted Marketable Securities
    
    
    252.3
    
    
    
    505.6
    
    
    
    504.8Other Assets
    
    
    37.7
    
    
    
    39.9
    
    
    
    39.6Total Assets
    
    $
    1,898.1
    
    
    $
    1,959.8
    
    
    $
    1,901.3LIABILITIES AND SHAREOWNERS EQUITYNet Accounts Payable to Affiliates
    
    $
    6.9
    
    
    $
    4.2
    
    
    $
    Senior and Subordinated Debt
    
    
    1,387.8
    
    
    
    1,461.9
    
    
    
    1,400.9Other Liabilities
    
    
    128.8
    
    
    
    129.5
    
    
    
    113.6Total Liabilities
    
    $
    1,523.5
    
    
    
    1,595.6
    
    
    
    1,514.5Shareowners Equity
Capital Stock (par value $1.00, 1,600,000 shares
issued and outstanding) and Paid-In Capital
    
    
    171.0
    
    
    
    171.0
    
    
    
    171.0Retained Earnings
    
    
    212.5
    
    
    
    204.6
    
    
    
    219.0Accumulated Other Comprehensive Loss
    
    
    (8.9
    )
    
    
    (11.4
    )
    
    
    (3.2
    )Total Shareowners Equity
    
    
    374.6
    
    
    
    364.2
    
    
    
    386.8Total Liabilities and Shareowners Equity
    
    $
    1,898.1
    
    
    $
    1,959.8
    
    
    $
    1,901.3
 See Notes to Consolidated Financial Statements. 3




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Navistar Financial Corporation and Subsidiaries Statements of Consolidated Cash Flow (Unaudited) Quarter EndedJanuary
    
    JanuaryMillions of Dollars
    
    2004
    
    2003Cash Flow From OperationsNet Income
    
    $
    7.9
    
    
    $
    26.9Adjustments to reconcile net income to cash provided from operations:Gains on sales of receivables
    
    
    (6.1
    )
    
    
    (32.5
    )Depreciation, amortization and accretion
    
    
    13.3
    
    
    
    16.4Provision for credit losses
    
    
    1.1
    
    
    
    4.2Net change in accounts payable (receivables) to (from) affiliates
    
    
    2.7
    
    
    
    (56.0
    )Net change in accrued income taxes
    
    
    6.2
    
    
    
    19.1Other
    
    
    (3.6
    )
    
    
    11.9Total
    
    
    21.5
    
    
    
    (10.0
    )Cash Flow From Investing ActivitiesOriginations of finance receivables held for sale
    
    
    (259.5
    )
    
    
    (229.8
    )Proceeds from sales of finance receivables held for sale
    
    
    195.0
    
    
    
    824.3Net change in restricted marketable securities
    
    
    253.2
    
    
    
    (400.2
    )Collections of retail notes and finance lease receivables,
net of change in unearned finance income
    
    
    25.3
    
    
    
    (23.3
    )Repurchase of sold retail receivables
    
    
    (64.6
    )
    
    
    (17.5
    )Net change in wholesale notes and accounts receivables
    
    
    (114.6
    )
    
    
    5.8Net change in amounts due from sales of receivables
    
    
    21.3
    
    
    
    5.6Purchase of equipment leased to others
    
    
    (5.3
    )
    
    
    (6.9
    )Sale of equipment leased to others
    
    
    4.0
    
    
    
    16.2Receipts from derivative contracts
    
    
    0.4
    
    
    
    1.3Payments on derivative contracts
    
    
    (0.3
    )
    
    
    (6.8
    )Total
    
    
    54.9
    
    
    
    168.7Cash Flow From Financing ActivitiesNet change in bank revolving credit facility usage
    
    
    (72.0
    )
    
    
    (156.0
    )Proceeds from long-term debt
    
    
    22.5
    
    
    
    27.9Principal payments on long-term debt
    
    
    (26.2
    )
    
    
    (34.7
    )Dividends paid to International
    
    
    
    
    
    
    (5.0
    )Total
    
    
    (75.7
    )
    
    
    (167.8
    )Change in Cash and Cash Equivalents
    
    
    0.7
    
    
    
    (9.1
    )Cash and Cash Equivalents, Beginning of Period
    
    
    
    
    
    
    32.0Cash and Cash Equivalents, End of Period
    
    $
    0.7
    
    
    $
    22.9Supplementary disclosure of cash flow information:Interest paid
    
    $
    9.8
    
    
    $
    12.2Income taxes paid, net of refunds
    
    $
    0.3
    
    
    $
    (4.0
    )
 See Notes to Consolidated Financial Statements. 4




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  1.
    BASIS OF PRESENTATION The consolidated financial statements include the accounts of Navistar
Financial Corporation and its wholly-owned subsidiaries (Corporation).
International Truck and Engine Corporation (International), which is
wholly owned by Navistar International Corporation (Navistar), is the
parent company of the Corporation. The accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the Corporations 2003
Annual Report on Form 10-K and should be read in conjunction with the
disclosures therein. In December 2003, the Financial Accounting Standards Board (FASB) issued a
revision to Statements of Financial Accounting Standards (SFAS) No. 132,
Employers Disclosure about Pensions and Other Postretirement Benefits.
This Statement retains the disclosures previously required by SFAS 132 but
adds additional disclosure requirements about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. It also calls for the required
information to be provided separately for pension plans and for other
postretirement benefit plans. The interim-period disclosures required by
this Statement are effective for interim periods beginning after December
15, 2003. The Corporation will provide the required disclosures beginning
in the quarter ended April 30, 2004. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation addresses consolidation
requirements of variable interest entities (VIEs). In December 2003, the
FASB revised this Interpretation to clarify the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest for the entity to finance its activities
without additional financial support. This Interpretation, as revised, is
effective for periods ending after December 15, 2003. The Corporation
determined that it does not have an interest in a VIE, as defined within
this Interpretation. Transferors to qualifying special purpose entities
(QSPEs) subject to the reporting requirements of FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, are excluded from the scope of this
interpretation. The Corporation currently sells receivables to entities
meeting the requirements of QSPEs. Therefore, this Interpretation has no
impact on the Corporations results of operations, financial condition, and
cash flows. On December 8, 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. The Act
introduces a voluntary prescription drug benefit under Medicare as well as a
federal subsidy to sponsors of retiree health care plans that provide
prescription drug benefits that are at least actuarially equivalent to
Medicare Part D. In January 2004, the FASB issued FASB Staff Position (FSP)
106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. The FSP 106-1
permits companies to defer the application of SFAS No. 106, Employers
Accounting for Postretirement Benefits Other Than Pensions, to the Medicare
Prescription Drug Bill. As permitted by FSP 106-1, the Corporation has
chosen to defer recognizing the effects of the Act on its postretirement
health care insurance plans until authoritative guidance is issued by the
FASB. Accordingly, the Corporations measures of the accumulated projected
benefit obligation and net periodic postretirement benefit expense do not
reflect the effects of the Act. Authoritative guidance on the timing and
method of accounting for the federal subsidy is pending. When issued, that
guidance could require the Corporation to change previously reported
information. The Corporation anticipates the Act will result in a reduction
of its future net health care expenses and liabilities. 5




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  1.
    BASIS OF PRESENTATION (continued) In the opinion of management, these interim financial statements reflect all
adjustments, consisting of normal recurring items, necessary to present
fairly the results of operations, financial condition and cash flow for the
interim periods presented. Interim results are not necessarily indicative of
results to be expected for any other interim period or for the full year.
Certain amounts in the prior period financial statements have been
reclassified to conform with current period presentations.  2.
    COMPREHENSIVE INCOME The Corporations total comprehensive income for the quarter ended was: Millions of Dollars
    
    2004
    
    2003Net income
    
    $
    7.9
    
    
    $
    26.9Change in net unrealized losses
on investments (net of tax of ($1.7) and ($0.0))
    
    
    2.5
    
    
    
    0.1Total comprehensive income
    
    $
    10.4
    
    
    $
    27.0
  3.
    FINANCE RECEIVABLES Finance receivables are summarized as follows: January 31,
    
    October 31,
    
    January 31,Millions of Dollars
    
    2004
    
    2003
    
    2003Retail notes, net of unearned income
    
    $
    511.1
    
    
    $
    404.5
    
    
    $
    294.4Finance leases, net of unearned income
    
    
    112.6
    
    
    
    115.4
    
    
    
    150.5Wholesale notes
    
    
    90.8
    
    
    
    46.0
    
    
    
    54.5Accounts:Retail
    
    
    286.9
    
    
    
    217.9
    
    
    
    158.4Wholesale
    
    
    84.3
    
    
    
    83.4
    
    
    
    75.7Total accounts
    
    
    371.2
    
    
    
    301.3
    
    
    
    234.1Total finance receivables
    
    
    1,085.7
    
    
    
    867.2
    
    
    
    733.5Less: Allowance for losses
    
    
    12.2
    
    
    
    12.9
    
    
    
    13.4Total finance receivables, net
    
    $
    1,073.5
    
    
    $
    854.3
    
    
    $
    720.1
 Finance receivables held for sale consisted of $623.7 million, $519.9
million, and $444.9 million in retail notes and finance leases, net of
unearned income, as of January 31, 2004, October 31, 2003, and January 31,
2003, respectively. 6




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  4.
    ALLOWANCE FOR LOSSES The allowance for losses is summarized as follows: January 31,
    
    October 31,
    
    January 31,Millions of Dollars
    
    2004
    
    2003
    
    2003Allowance for losses, beginning of period
    
    $
    12.9
    
    
    $
    16.0
    
    
    $
    16.0Provision for credit losses
    
    
    1.1
    
    
    
    15.8
    
    
    
    4.2Net losses charged to allowance
    
    
    (0.4
    )
    
    
    (4.2
    )
    
    
    (1.9
    )Allocated to finance receivables sold
    
    
    (1.4
    )
    
    
    (14.7
    )
    
    
    (4.9
    )Allowance for losses, end of period
    
    $
    12.2
    
    
    $
    12.9
    
    
    $
    13.4
 The average outstanding balance of impaired finance receivables was not
material for the quarters ended January 31, 2004 and 2003 or for the year
ended October 31, 2003. Interest income that would have been recognized on
impaired finance receivables during the quarters ended January 31, 2004 and
2003 or for the year ended October 31, 2003 was not material. Balances with payments past due over 90 days on owned finance receivables,
including held for sale, totaled $5.5 million as of January 31, 2004.  5.
    SENIOR AND SUBORDINATED DEBT Senior and subordinated debt outstanding is summarized as follows: January 31,
    
    October 31,
    
    January 31,Millions of Dollars
    
    2004
    
    2003
    
    2003Bank revolving credit facility, at variable rates,
due December 2005
    
    $
    499.0
    
    
    $
    571.0
    
    
    $
    426.0Revolving retail warehouse facility, at variable
rates, due October 2005
    
    
    500.0
    
    
    
    500.0
    
    
    
    500.0Borrowings secured by operating leases, 3.45%
to 6.65%, due serially through December 2010
    
    
    208.9
    
    
    
    212.5
    
    
    
    300.8Convertible debt, 4.75%, due April 2009
    
    
    179.9
    
    
    
    178.4
    
    
    
    174.1Total senior and subordinated debt
    
    $
    1,387.8
    
    
    $
    1,461.9
    
    
    $
    1,400.9
 As of January 31, 2004, October 31, 2003, and January 31, 2003 the
Corporation had unaccreted discount of $40.1 million, $41.6 million, and
$45.9 million respectively, related to the convertible debt. 7




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  6.
    DERIVATIVE FINANCIAL INSTRUMENTS The Corporation uses derivative financial instruments as part of its overall
interest rate risk management strategy as further described under Footnote
13 of the 2003 Annual Report on Form 10-K. The Corporation manages its exposure to fluctuations in interest rates by
limiting the amount of fixed rate assets funded with variable rate debt.
This is accomplished by selling fixed rate receivables on a fixed rate basis
and by utilizing derivative financial instruments. These derivative
financial instruments may include forward contracts, interest rate swaps,
and interest rate caps. The fair value of these instruments is estimated
based on quoted market prices and is subject to market risk as the
instruments may become less valuable due to changes in market conditions or
interest rates. The Corporation manages exposure to counterparty credit
risk by entering into derivative financial instruments with major financial
institutions that can be expected to fully perform under the terms of such
agreements. The Corporation does not require collateral or other security
to support derivative financial instruments with credit risk. The
Corporations counterparty credit exposure is limited to the positive fair
value of contracts at the reporting date. As of January 31, 2004, the
Corporations derivative financial instruments had a negative net fair
value. Notional amounts of derivative financial instruments do not represent
exposure to credit loss. As of January 31, 2004, the notional amounts and fair values of the
Corporations derivative financial instruments are summarized as follows: Inception
    
    Maturity
    
    Instrument
    
    Notional
    
    Fair Value(Millions of Dollars)October 2000
    
    November 2012
    
    Interest rate cap
    
    $
    500.0
    
    
    $
    (3.7
    )November 2012
    
    Interest rate cap
    
    
    500.0
    
    
    
    3.7July 2001
    
    April 2006
    
    Interest rate swap
    
    
    28.0
    
    
    
    (1.3
    )November 2001
    
    June 2004
    
    Interest rate swap*
    
    
    36.6
    
    
    
    (0.2
    )July 2006
    
    Interest rate swap*
    
    
    52.8
    
    
    
    0.3November 2002
    
    March 2007
    
    Interest rate swap*
    
    
    -
    
    
    
    (0.4
    )September 2003
    
    June 2005
    
    Forward starting swap*
    
    
    50.0
    
    
    
    (0.2
    )October 2003
    
    April 2008
    
    Interest rate swap*
    
    
    -
    
    
    January 2004
    
    December 2005
    
    Forward starting swap*
    
    
    50.0
    
    
    
    0.1December 2005
    
    Forward starting swap*
    
    
    50.0
    
    
    
 * Accounted for as non-hedging instruments. The fair values of all derivatives are recorded in Other Liabilities on the
Statements of Consolidated Financial Condition. In September 2003 and January 2004, the Corporation entered into several
forward starting swap agreements, with an aggregate notional amount of
$150.0 million, in connection with an anticipated sale of retail notes and
finance leases. The Corporation recognized an aggregate pre-tax loss of
$0.1 million during the first quarter of fiscal 2004 related to these
agreements. The purpose of these swaps is to limit the Corporations
interest rate risk exposure during the period it is accumulating receivables
for an anticipated sale. 8




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  7.
    SALES OF RECEIVABLES During the first quarter of fiscal 2004, the Corporation sold $195.0 million
of retail notes and leases for a pre-tax gain of $6.1 million compared to
the first quarter of fiscal 2003, when the Corporation sold $824.3 million
of retail receivables for a pre-tax gain of $32.5 million. The Corporations retained interests, which include interest-only
receivables, cash reserve accounts, and subordinated certificates, are
recorded at fair value in the periods in which the sales occur. The fair
value of the interest-only receivable is based on updated estimates of
prepayment speeds and discount rates. The Corporation reassesses the fair
value of the retained interests on a quarterly basis. The following table summarizes, for the quarter ended January 31,
income related to sales of finance receivables: Millions of Dollars
    
    2004
    
    2003Gains on sales of receivables
    
    $
    6.1
    
    
    $
    32.5Excess (negative) spread
    
    
    (0.5
    )
    
    
    5.1Fair value adjustment
    
    
    (2.4
    )
    
    
    Derivative gains (losses)
    
    
    (0.3
    )
    
    
    0.8Interest income from retained securities and other
    
    
    0.4
    
    
    
    0.4Total income related to
sales of finance receivables
    
    $
    3.3
    
    
    $
    38.8
  8.
    COMMITMENTS AND CONTINGENCIES Leases The Corporation is obligated under non-cancelable operating leases for
the majority of its office facilities. These leases are generally renewable
and provide that property taxes and maintenance costs are to be paid by the
lessee. As of January 31, 2004, future minimum lease commitments under
non-cancelable operating leases with remaining terms in excess of one year
are as follows: Twelve month period ended January 31,
    
    (Millions of Dollars)2005
    
    
    
    
    
    $
    1.82006
    
    
    
    
    
    
    1.52007
    
    
    
    
    
    
    0.8Total
    
    
    
    
    
    $
    4.1
 The Corporation does not have any future lease commitments under
non-cancelable operating leases for periods after January 31, 2007. The
total operating lease expense for the quarter ended January 31, 2004 and
2003 was $0.2 million and $0.6 million, respectively. 9




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  8.
    COMMITMENTS AND CONTINGENCIES (continued) Guarantees of Debt The Corporation periodically guarantees the outstanding debt of affiliates.
The guarantees allow for diversification of funding sources for the
affiliates. As of January 31, 2004, the Corporation has multiple guarantees
related to Navistars three Mexican finance subsidiaries, Servicios
Financieros Navistar, S.A. de C.V. (SOFOL), Arrendadora Financiera
Navistar, S.A. de C.V. (Arrendadora) and Navistar Comercial S.A. de C.V.
The Corporation has no recourse as guarantor in case of default. The following table summarizes the borrowings as of January 31, 2004: Type of Funding
    
    Maturity
    Amount of Guaranty
    Outstanding Balance(Millions of Dollars)Revolving credit facility
    
    December 2005
    
    $
    100.0
    
    
    $
    36.0Medium term note*
    
    November 2004
    
    
    45.4
    
    
    
    45.4Revolving credit facility*
    
    March 2006
    
    
    3.5
    
    
    
    3.5Revolving credit facility*
    
    January 2007
    
    
    18.1
    
    
    
    18.1Revolving credit facility*
    
    Indefinite**
    
    
    18.1
    
    
    Total
    
    
    
    
    
    $
    103.0
 * Peso-denominated ** The bank reviews the terms of this facility monthly. This facility may
be used for as long as all the conditions and terms are met. Guarantees of Derivatives As of January 31, 2004, the Corporation had guaranteed derivative contracts
for interest rate swaps and cross currency swaps related to SOFOL and
Arrendadora. The Corporation is liable up to the fair market value of these
derivative contracts only in cases of default by SOFOL and Arrendadora. The following table summarizes the guaranteed derivative contracts as of
January 31, 2004: Outstanding
    
    FairInstrument
    
    Maturity
    
    Notional
    
    Value(Millions of Dollars)Interest rate swaps and
cross currency swaps*
    
    April 2004
    
    $
    73.1
    
    
    $
    (0.9
    )
 * Peso-denominated 10




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  8.
    COMMITMENTS AND CONTINGENCIES (continued) Other The Corporation has entered into an agreement for the repurchase of
equipment. Under this agreement, which matures in August 2004, the
Corporation would be required to make a maximum potential future payment of
$11.9 million. Under the provisions of this agreement, the Corporation can
liquidate the repurchased assets to recover all or a portion of the payment.
The Corporation has potential exposure to the extent that there is a
difference between the fair value of the repurchased asset and the
guaranteed repurchase amount. The Corporations current exposure under this
agreement is estimated to be immaterial. On November 30, 2001, the Corporation completed the sale of all of the stock
of Harco National Insurance Company (Harco), a wholly-owned insurance
subsidiary, to IAT Reinsurance Syndicate Ltd. (IAT), a Bermuda reinsurance
company. As part of its sales agreement with IAT, the Corporation has
agreed to guarantee the adequacy of Harcos loss reserves. There is no
limit to the potential amount of future payments required by the Corporation
related to this reserve. The sales agreement is scheduled to expire
November 2008. As security for its obligation under this agreement, the
Corporation has escrowed $5.0 million, which is included in Other Assets in
the Consolidated Statements of Financial Condition. The escrowed funds will
become available for use in February 2004. The carrying amount of the
Corporations liability under this guarantee is estimated at $4.5 million as
of January 31, 2004 and is included in Other Liabilities in the Consolidated
Statements of Financial Condition. Management believes this reserve is
adequate to cover any future potential payments to IAT. 11




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES 
  ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Certain statements under this caption purely constitute forward-looking
statements within the meaning of Section 27A of the Securities Act, Section
21E of the Exchange Act, and the Private Securities Litigation Reform Act of
1995 that are subject to risks and uncertainties. Navistar Financial
Corporations (Corporation) actual results may differ significantly from the
results discussed in such 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,
and such forward-looking statements only speak as of the date of this Form
10-Q. 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 based on assumptions that we have made in light of our
experience in the industry as well as our perceptions of historical trends,
current conditions, expected future developments and other factors we believe
are appropriate under the circumstances. As you read and consider this Form
10-Q, you should understand that these statements are not guarantees of
performance or results. They involve risks, uncertainties and assumptions.
Although we believe that these forward-looking statements are based on
reasonable assumptions, you should be aware that 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.
Factors that might cause such a difference include, but are not limited to,
those discussed under the heading Business Outlook. Overview The Corporation was incorporated in Delaware in 1949 and is a wholly-owned
subsidiary of International Truck and Engine Corporation (International),
which is a wholly-owned subsidiary of Navistar International Corporation
(Navistar). As used herein, the Corporation refers to Navistar Financial
Corporation and its wholly-owned subsidiaries unless the context otherwise
requires. The Corporation is a commercial financing organization that provides
wholesale, retail and lease financing in the United States for sales of new
and used trucks sold by International and Internationals dealers. The
Corporation also finances wholesale accounts and selected retail accounts
receivable of International. Sales of new products (including trailers) of
other manufacturers are also financed regardless of whether they are designed
or customarily sold for use with Internationals truck products. The Corporation also services finance receivables it originates and purchases.
The Corporations source of revenues are primarily from sales of its
receivables, servicing of its sold receivables, earnings from investments,
interest earned from its financing programs and payments made under wholesale
and other dealer loan financing programs. The Corporation is exposed to market risk primarily due to fluctuations in
interest rates during the accumulation period prior to a securitization sale.
Interest rate risk arises from the funding of a portion of the Corporations
fixed rate receivables with floating rate debt. The Corporation has managed
exposure to interest rate changes by funding floating rate receivables with
floating rate debt and fixed rate receivables with fixed rate debt, floating
rate debt and equity capital. Management has reduced the net exposure, which
results from the funding of fixed rate receivables with floating rate debt by
generally selling fixed rate receivables on a fixed rate basis and by
utilizing derivative financial instruments when appropriate. 12




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES  ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Business Outlook Navistar currently projects 2004 U.S. and Canadian Class 8 heavy truck demand
to be 208,000 units, up 30.6% from 2003. Class 6 and 7 medium truck demand,
excluding school buses, is forecast at 93,000 units, up 24.3% from 2003.
Demand for school buses is expected to be 27,500 units, down 5.8% from 2003.
Mid-range diesel engine shipments by Navistar to OEMs in 2004 are expected to
be 349,200 units, 5.1% higher than 2003. Critical Accounting Policies The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates,
judgments, and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. In preparing these
financial statements, management has made its best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The significant accounting principles which management
believes are the most important to aid in fully understanding the
Corporations financial results are:  
    
    Sales of Receivables
    
    Allowance for Losses Details regarding the Corporations use of these policies and the related
estimates are described in the Corporations 2003 Annual Report on Form 10-K. Results of Continuing Operations First Quarter 2004 Compared with First Quarter 2003 Net income was $7.9 million for the first quarter of 2004, compared with $26.9
million for the first quarter of 2003. During the first quarter of fiscal
2004, the Corporation sold $195.0 million of retail notes and leases for a
pre-tax gain of $6.1 million, compared with the first quarter of fiscal 2003
when the Corporation sold $824.3 million of retail receivables for a pre-tax
gain of $32.5 million. The net income decrease of $19.0 million is mainly due
to lower sales of receivables at slightly lower margins. Lower receivables
sales volume reflects a timing difference while lower margins primarily
indicate an increased level of competition. The total income related to sales of finance receivables declined from $38.8
million in the first quarter of 2003 to $3.3 million in the first quarter of
2004. In addition to the difference attributable to the receivables sales
volume and margin, the Corporation was negatively impacted by lower excess
spread and an adjustment to fair value of its retained interests. The
Corporation evaluates the fair value of its retained interests quarterly and
makes adjustments to these values when it deems permanent changes in its
assumptions have changed. Allowance for losses, including the portion allocated to sold notes, as a
percentage of net serviced finance receivables and investments in operating
leases, was 0.67% as of January 31, 2004, compared with 0.77% as of January 31,
2003. The Corporation has been experiencing lower past due finance receivables
balances and fewer losses during the first quarter of fiscal 2004, compared
with the same 13




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES  ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Continuing Operations (continued) period of fiscal 2003. This is directly related to the Corporations improved
portfolio performance and improved recoveries in the used truck market. The
allowance is maintained at an amount management considers appropriate in
relation to the outstanding portfolio based on factors such as overall
portfolio credit risk quality, historical loss experience, and current economic
conditions. Financial Condition Finance Volume and Finance Market Share During the first quarter of fiscal 2004, the Corporations net retail notes and
finance leases originations were $259.5 million, compared with $229.8 million
during the same period of fiscal 2003. Net serviced retail notes and finance
leases balances were $2,500.5 million and $2,712.6 million as of January 31,
2004 and 2003, respectively. The Corporations finance market share of new
International trucks sold in the U.S. was approximately the same at 14.9% at
January 31, 2004, compared to 14.8% at January 31, 2003. Wholesale note originations were $821.1 million for the first quarter of fiscal
2004, compared with $719.5 million for the same period of fiscal 2003.
Serviced wholesale note balances were $889.0 million and $831.5 million as of
January 31, 2004 and 2003, respectively. The increase in wholesale note
balances and originations reflects an increase in International orders and
retail deliveries. The Corporation has seen an improvement in its truck repossession activities.
The serviced repossession balance decreased significantly from $33.7 million,
as of January 31, 2003, to $19.0 million, as of January 31, 2004, as a result
of lower acquisition of repossessed vehicles. Funds Management The Corporation has traditionally obtained the funds to provide financing to
Internationals dealers and retail customers from sales of finance receivables,
commercial paper, short and long-term bank borrowings, and medium and long-term
debt. The Corporations current debt ratings have made sales of finance
receivables the most economical source of funding. Credit Ratings The Corporations debt ratings as of January 31, 2004 are as follows: StandardFitch
    
    Moody's
    
    and Poor'sSenior unsecured debt
    
    BB
    
    Ba3
    
    BB-Subordinated debt
    
    
    B+
    
    
    
    B2
    
    
    
    BOutlook
    
    Negative
    
    Stable
    
    Stable
 In February 2004, Fitch upgraded the Corporations outlook to Stable. 14




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES  ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Funds Management (continued) Funding Facilities Receivable sales are a significant source of funding. Through the asset-backed
public market and private placement sales, the Corporation has been able to
fund fixed rate retail notes and finance leases at rates, which are more
economical than those available to the Corporation in the public unsecured bond
market. The Corporation sells retail notes and finance leases through Navistar
Financial Retail Receivables Corporation (NFRRC), a special purpose,
wholly-owned subsidiary of the Corporation. During the first quarters of 2004 and 2003, the Corporation sold $195.0 million
and $824.3 million, respectively, of retail notes and finance leases to an
owner trust which, in turn, issued asset-backed securities that were sold to
investors. As of January 31, 2004, the remaining shelf registration available
to NFRRC for the public issuance of asset-backed securities was $600.0 million. Truck Engine Receivables Financing Corporation, a special purpose, wholly-owned
subsidiary of the Corporation, has in place a trust that provides for the
funding of $100.0 million of unsecured trade receivables generated by the sale
of diesel engines and engine service parts from International to Ford Motor
Company. The facility matures in 2006. As of January 31, 2004, the
Corporation had utilized $100.0 million of this facility. Truck Retail Accounts Corporation, a special purpose, wholly-owned subsidiary
of the Corporation, exists to provide funding of eligible retail accounts. The
Corporation is in the process of obtaining refinancing for the retail accounts. Navistar Financial Securities Corporation, a special purpose, wholly-owned
subsidiary of the Corporation, has in place a revolving wholesale note trust
that provides for the funding of up to $1,024.0 million of eligible wholesale
notes. As of January 31, 2004, it comprised two $200.0 million tranches of
investor certificates maturing in 2004 and 2008, two $212.0 million tranches of
investor certificates maturing in 2005 and 2006, and variable funding
certificates (VFC) with a maximum capacity of $200.0 million, which matured
in January 2004. The VFC was renewed and has a maturity date of February 2005.
As of January 31, 2004, the Corporation had utilized $798.2 million of the
revolving wholesale note trust. Truck Retail Installment Paper Corporation, a special purpose wholly-owned
subsidiary of the Corporation, issued $500.0 million of senior and subordinated
floating rate asset-backed notes on October 16, 2000. The proceeds were used
to establish a revolving retail warehouse facility to fund the Corporations
retail notes and retail leases, other than fair market value leases, during the
accumulation period prior to a receivable sale. There were $316.1 million in
retail notes and leases at the end of the first quarter 2004, compared with no
retail notes and leases at the end of the first quarter 2003. This difference
is a result of the large retail receivables sale, which occurred in the first
quarter of 2003. The Corporation also has $820.0 million contractually committed to bank
revolving credit facility that will mature in December 2005. As of January 31,
2004, $535.0 million of this facility was utilized. As of January 31, 2004, the aggregate available to fund finance receivables
under all the various facilities was $821.6 million. 15




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES  ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Funds Management (continued) Funding Facilities The weighted average borrowing rate on all debt outstanding for the first
quarter of fiscal 2004 decreased to 4.65% from 5.31% for the same period in
2003. The decrease in the Corporations weighted average borrowing rate is
primarily a result of lower LIBOR rates. Management believes that collections on the outstanding finance receivables
portfolio plus cash available from the Corporations various funding sources
will permit the Corporation to meet the financing requirements of
Internationals dealers and retail customers through 2004 and beyond. New Accounting Pronouncements The consolidated financial statements include the accounts of Navistar
Financial Corporation and its wholly-owned subsidiaries (Corporation).
International Truck and Engine Corporation (International), which is wholly
owned by Navistar International Corporation (Navistar), is the parent company
of the Corporation. The accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the Corporations 2003 Annual
Report on Form 10-K and should be read in conjunction with the disclosures
therein. In December 2003, the Financial Accounting Standards Board (FASB) issued a
revision to Statements of Financial Accounting Standards (SFAS) No. 132,
Employers Disclosure about Pensions and Other Postretirement Benefits. This
Statement retains the disclosures previously required by SFAS 132 but adds
additional disclosure requirements about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. It also calls for the required
information to be provided separately for pension plans and for other
postretirement benefit plans. The interim-period disclosures required by this
Statement are effective for interim periods beginning after December 15, 2003.
The Corporation will provide the required disclosures beginning in the quarter
ended April 30, 2004. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation addresses consolidation
requirements of variable interest entities (VIEs). In December 2003, the
FASB revised this Interpretation to clarify the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest for the entity to finance its activities without
additional financial support. This Interpretation, as revised, is effective
for periods ending after December 15, 2003. The Corporation determined that it
does not have an interest in a VIE, as defined within this Interpretation.
Transferors to qualifying special purpose entities (QSPEs) subject to the
reporting requirements of FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, are excluded
from the scope of this interpretation. The Corporation currently sells
receivables to entities meeting the requirements of QSPEs. Therefore, this
Interpretation has no impact on the Corporations results of operations,
financial condition, and cash flows. On December 8, 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. The Act
introduces a voluntary prescription drug 16




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES  ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION New Accounting Pronouncements (continued) benefit under Medicare as well as a
federal subsidy to sponsors of retiree health care plans that provide
prescription drug benefits that are at least actuarially equivalent to Medicare
Part D. In January 2004, the FASB issued FASB Staff Position (FSP) 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. The FSP 106-1 permits
companies to defer the application of SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, to the Medicare Prescription Drug
Bill. As permitted by FSP 106-1, the Corporation has chosen to defer
recognizing the effects of the Act on its postretirement health care insurance plans until authoritative guidance is
issued by the FASB. Accordingly, the Corporations measures of the accumulated
projected benefit obligation and net periodic postretirement benefit expense do
not reflect the effects of the Act. Authoritative guidance on the timing and
method of accounting for the federal subsidy is pending. When issued, that
guidance could require the Corporation to change previously reported
information. The Corporation anticipates the Act will result in a reduction of
its future net health care expenses and liabilities. 17




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##### Table of Contents



NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES 
  ITEM 4.
    CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Corporations principal executive officer and principal financial officer,
along with other management of the Corporation, evaluated the Corporations
disclosure controls and procedures (as defined in rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of January 31, 2004.
Based on that evaluation, the principal executive officer and principal
financial officer of the Corporation concluded that, as of January 31, 2004,
the disclosure controls and procedures in place at the Corporation were (1)
designed to ensure that material information relating to the Corporation is
made known to them to allow timely decisions regarding required disclosure and
(2) effective, in that such disclosure controls and procedures provide
reasonable assurance that information required to be disclosed by the
Corporation in reports that the Corporation files or submits under the Exchange
Act, is recorded, processed, summarized and reported on a timely basis in
accordance with applicable rules and regulations. Although the Corporations
principal executive officer and principal financial officer believe the
Corporations existing disclosure controls and procedures are adequate to
enable the Corporation to comply with its disclosure obligations, the
Corporation is in the process of formalizing and documenting the procedures
already in place. Changes in Internal Controls The Corporation has not made any change to its internal control over financial
reporting (as defined in rule 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fiscal quarter ended January 31, 2004 that have materially affected,
or are reasonably likely to materially affect, the Corporations internal
control over financial reporting. 18




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##### Table of Contents



NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES 
 PART II  OTHER INFORMATION (continued) 
  ITEM 1.
    LEGAL PROCEEDINGS There were no material pending legal proceedings other than ordinary, routine
litigation incidental to the business of the Corporation. 
  ITEM 5.
    OTHER INFORMATION Effective February 11, 2004, Pam Turbeville became Chief Executive Officer of
the Corporation. 
  ITEM 6.
    EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3
    
    
    Articles of Incorporation and By-Laws
    
    E-13.1
    
    
    Amendment to the Mater Intercompany Agreement
    
    E-23.2
    
    
    Amendment to the Credit Agreement
    
    E-44
    
    
    Instruments Defining Rights of Security Holders,
including Indentures
    
    E-1010
    
    
    Material Contracts
    
    E-1131.1
    
    
    CEO Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    E-1731.2
    
    
    CFO Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    E-1932
    
    
    CEO Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
    
    E-2132
    
    
    CFO Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
    
    E-21
 (b) No reports on Form 8-K were filed during the quarter ended January 31, 2004. 19




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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES 
 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Navistar Financial Corporation
(Registrant) Date March 8, 2004
    /s/ Paul MartinPaul MartinVice President and Controller
(Principal Accounting Officer) 20