**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D. C.  20549**

 

**FORM10-Q**

 

**ý****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended January 31, 2005**

 

**OR**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from        to        **

 

**Commission File Number 1-4146-1**

 

**NAVISTAR FINANCIAL CORPORATION**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **36-2472404**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **425 N.  Martingale Road, Schaumburg, Illinois**               | ** ** | **60173**                            |
| (Address of  principal executive offices)                       |       | (Zip Code)                           |

 

Registrant’s telephone number including area code **630-753-4000**

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15 (d) of the Securities Exchange Act of 1934 during the preceding 12 monthsand (2) has been subject to such filing requirements for the past 90 daysYes  ýNo  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  Yes o  No ý

 

**APPLICABLE ONLY TO ISSUERS INVOLVED**

**IN BANKRUPTCY PROCEEDINGS DURING**

**THE PRECEDING FIVE YEARS:**

 

Indicate by check mark whetherthe registrant has filed all documents and reports required to be filed bySections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent tothe distribution of securities under a plan confirmed by a court.  Yes oNo o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

 

As of February 28, 2005, thenumber of shares outstanding of the registrant’s common stock was 1,600,000.

 

THE REGISTRANT IS AWHOLLY-OWNED SUBSIDIARY OF INTERNATIONAL TRUCK AND ENGINE CORPORATION, WHICH ISA WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL CORPORATION, AND MEETS THECONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q ANDIS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 

 

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**INDEX**

 
| **PART I.**   | **FINANCIAL INFORMATION**                                                                                                                               |   |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                                                    |   |
| Item 1.       | Condensed Financial Statements:                                                                                                                         |   |
|          |                                                                                                                                                    |   |
|          | Condensed Statements of Consolidated  Income, Comprehensive Income, and Retained Earnings — Quarter Ended January  31, 2005 and 2004 (as restated) |   |
|          |                                                                                                                                                    |   |
|          | Condensed Statements of Consolidated  Financial Condition — January 31, 2005; October 31, 2004; and  January 31, 2004 (as restated)                |   |
|          |                                                                                                                                                    |   |
|          | Condensed Statements of Consolidated Cash  Flow — Quarter Ended January 31, 2005 and 2004 (as restated)                                            |   |
|          |                                                                                                                                                    |   |
|          | Notes to Condensed Consolidated Financial  Statements                                                                                                   |   |
|          |                                                                                                                                                    |   |
| Item 2.       | Management’s Discussion and Analysis of  Results of Operations and Financial Condition                                                             |   |
|          |                                                                                                                                                    |   |
| Item 4.       | Controls and Procedures                                                                                                                                 |   |
|          |                                                                                                                                                    |   |
| **PART II.**  | **OTHER INFORMATION**                                                                                                                                   |   |
|          |                                                                                                                                                    |   |
| Item  1.      | Legal Proceedings                                                                                                                                       |   |
|          |                                                                                                                                                    |   |
| Item  5.      | Other Information                                                                                                                                       |   |
|          |                                                                                                                                                    |   |
| Item 6.       | Exhibits and Reports on Form 8-K                                                                                                                        |   |
|          |                                                                                                                                                    |   |
| **Signature** |                                                                                                                                                    |   |

 

1

----

 

**PartI** – Financial Information

 

**Item 1****. Financial Statements**

 

**Navistar Financial Corporation and Subsidiaries**

**Condensed**Statementsof Consolidated Income and Retained Earnings(Unaudited)

 
| ** **                                      | ** ** | **Quarter  Ended** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| **Millions of Dollars**                         | ** ** | **January  2005**  | ** ** | **(As  Restated)  (See Note 2)  January  2004** | ** ** |
| **Revenues**                                    | ** ** | ** **         | ** ** | ** ** | ** ** |
| Retail Notes and Finance Leases                 | ** ** | **$**              | **6.6**    |   | $ | 11.4 |   |
| Income Related to Sales of Finance  Receivables | ** ** | **17.9**           |       | 10.4 |   |
| Operating Leases                                | ** ** | **11.6**           |       | 13.6 |   |
| Wholesale Notes                                 | ** ** | **11.2**           |       | 7.4 |   |
| Accounts                                        | ** ** | **5.7**            |       | 4.8 |   |
| Servicing Income                                | ** ** | **8.9**            |       | 6.1 |   |
| Other Revenue                                   | ** ** | **2.7**            |       | 1.2 |   |
| **Total**                                       | ** ** | **64.6**           |       | 54.9 |   |
|                                            |       |               |       |   |   |
| **Expenses**                                    | ** ** | ** **         | ** ** | ** ** | ** ** |
| Cost of Borrowing                               |       |               |       |   |   |
| Interest Expense                                | ** ** | **10.2**           |       | 11.7 |   |
| Other                                           | ** ** | **1.5**            |       | 2.0 |   |
| Credit, Collection and Administrative           | ** ** | **10.4**           |       | 11.0 |   |
| Provision for Credit Losses                     | ** ** | **2.5**            |       | 1.1 |   |
| Depreciation on Equipment on Operating  Leases  | ** ** | **8.2**            |       | 10.4 |   |
| Other Expense                                   | ** ** | **0.6**            |       | 0.5 |   |
| **Total**                                       | ** ** | **33.4**           |       | 36.7 |   |
|                                            |       |               |       |   |   |
| **Income Before Taxes**                         | ** ** | **31.2**           |       | 18.2 |   |
| Income Tax Expense                              | ** ** | **12.1**           |       | 6.9 |   |
| ** **                                      | ** ** | ** **         | ** ** | ** ** | ** ** |
| **Net Income**                                  | ** ** | **19.1**           |       | 11.3 |   |
|                                            |       |               |       |   |   |
| **Retained Earnings**                           | ** ** | ** **         | ** ** | ** ** | ** ** |
| Beginning of Period                             | ** ** | **246.0**          |       | 184.9 |   |
| Dividends Paid                                  | ** ** | **—**         |       | — |   |
| End of Period                                   | ** ** | **$**              | **265.1**  |   | $ | 196.2 |   |

 

**Condensed****Statements of Consolidated Comprehensive Income**

 
| ** **                                                                  | ** ** | **Quarter  Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|
| **Millions of Dollars**                                                     | ** ** | **January  2005**  | ** ** | **(As  Restated)  (See Note 2)  January 2004** | ** ** |
| **Net Income**                                                              | ** ** | **$**              | **19.1**   |   | $ | 11.3 |   |
| Other Comprehensive Loss:                                                   |       |               |       |   |   |
| Net Unrealized Gains (Losses) on  Investments (net of tax of $2.5 and $1.2) | ** ** | **4.1**            |       | 1.9 |   |
| Minimum Pension Liability Adjustment (net  of tax of $0.0 and $0.0)         | ** ** | **0.1**            |       | 0.0 |   |
| Total                                                                       | ** ** | **4.2**            |       | 1.9 |   |
| **Comprehensive Income**                                                    | ** ** | **$**              | **23.3**   |   | $ | 13.2 |   |

 

**See Notes to Condensed ConsolidatedFinancial Statements.**

 

2

----

 

**Navistar Financial Corporation and Subsidiaries**

**Condensed**Statementsof Consolidated Financial Condition(Unaudited)

 
| **Millions of Dollars**                                                                       | ** ** | **January 31,  2005** | ** **  | **October 31,  2004** | ** ** | **(As Restated)  (See Note 2)  January 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|----------------------------------------------------|------------|
|                                                                                          |       |                  |        |                  |       |                                               |       |
| **ASSETS**                                                                                    | ** ** | ** **            | ** **  | ** **            | ** ** | ** **                                         | ** ** |
| ** **                                                                                    | ** ** | ** **            | ** **  | ** **            | ** ** | ** **                                         | ** ** |
| Cash and Cash Equivalents                                                                     | ** ** | **$**                 | **40.4**    |                  | $          | 10.4                                               |       | $ | 0.7 |   |
| Finance Receivables                                                                           |       |                  |        |                  |       |                                               |       |
| Finance Receivables                                                                           | ** ** | **938.0**             |        | 1,219.8               |       | 1,074.0                                            |       |
| Finance Receivables from Affiliates                                                           | ** ** | **31.2**              |        | 56.0                  |       | 11.7                                               |       |
| Allowance for Losses                                                                          | ** ** | **(3.9**              | **)**       | (6.7                  | )          | (12.2                                              | )          |
| Finance Receivables, Net                                                                      | ** ** | **965.3**             |        | 1,269.1               |       | 1,073.5                                            |       |
|                                                                                          |       |                  |        |                  |       |                                               |       |
| Amounts Due from Sales of Receivables                                                         | ** ** | **384.7**             |        | 383.4                 |       | 338.5                                              |       |
| Net Investment in Equipment on Operating  Leases                                              | ** ** | **136.1**             |        | 148.9                 |       | 182.0                                              |       |
| Restricted Marketable Securities                                                              | ** ** | **315.7**             |        | 63.0                  |       | 252.3                                              |       |
| Other Assets                                                                                  | ** ** | **31.0**              |        | 33.5                  |       | 50.1                                               |       |
| **Total Assets**                                                                              | ** ** | **$**                 | **1,873.2** |                  | $          | 1908.3                                             |       | $ | 1,897.1 |   |
|                                                                                          |       |                  |        |                  |       |                                               |       |
| **LIABILITIES AND SHAREOWNER’S EQUITY**                                                  |       |                  |        |                  |       |                                               |       |
|                                                                                          |       |                  |        |                  |       |                                               |       |
| Net Accounts Payable to Affiliates                                                            | ** ** | **$**                 | **5.0**     |                  | $          | 43.5                                               |       | $ | 5.9 |   |
| Senior and Subordinated Debt                                                                  | ** ** | **1,297.4**           |        | 1,325.2               |       | 1,387.8                                            |       |
| Other Liabilities                                                                             | ** ** | **123.9**             |        | 116.0                 |       | 137.8                                              |       |
| **Total Liabilities**                                                                         | ** ** | **1,426.3**           |        | 1,484.7               |       | 1,531.5                                            |       |
|                                                                                          |       |                  |        |                  |       |                                               |       |
| Shareowner’s Equity                                                                      |       |                  |        |                  |       |                                               |       |
| Capital Stock (par value $1.00, 1,600,000  shares issued and outstanding) and Paid-In Capital | ** ** | **182.9**             |        | 182.9                 |       | 171.0                                              |       |
| Retained Earnings                                                                             | ** ** | **265.1**             |        | 246.0                 |       | 196.2                                              |       |
| Accumulated Other Comprehensive Loss                                                          | ** ** | **(1.1**              | **)**       | (5.3                  | )          | (1.6                                               | )          |
| **Total Shareowner’s Equity**                                                            | ** ** | **446.9**             |        | 423.6                 |       | 365.6                                              |       |
|                                                                                          |       |                  |        |                  |       |                                               |       |
| **Total Liabilities and Shareowner’s Equity**                                            | ** ** | **$**                 | **1,873.2** |                  | $          | 1,908.3                                            |       | $ | 1,897.1 |   |

 

**See Notes to Condensed Consolidated Financial Statements.**

 

3

----

 

**Navistar Financial Corporation and Subsidiaries**

**CondensedStatements of Consolidated Cash Flow**(Unaudited)

 
| ** **                                                                                           | ** ** | **Quarter  Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| **Millions of Dollars**                                                                              | ** ** | **January  2005**  | ** ** | **(As  Restated)  (See Note 2)  January  2004** | ** ** |
| **Cash Flow From Operations**                                                                        | ** ** | ** **         | ** ** | ** ** | ** ** |
| Net Income                                                                                           | ** ** | **$**              | **19.1**   |   | $ | 11.3 |   |
| Adjustments to reconcile net income to cash  provided from operations:                               |       |               |       |   |   |
| Gains on sales of receivables                                                                        | ** ** | **(11.1**          | **)**      | (4.4 | ) |
| Depreciation, amortization and accretion                                                             | ** ** | **2.6**            |       | 7.2 |   |
| Provision for credit losses                                                                          | ** ** | **2.5**            |       | 1.1 |   |
| Net change in accounts payable  (receivables) to (from) affiliates                                   | ** ** | **(13.6**          | **)**      | 3.5 |   |
| Net change in accounts payable other                                                                 | ** ** | **(3.2**           | **)**      | (6.0 | ) |
| Net change in accrued income taxes                                                                   | ** ** | **14.5**           |       | 8.3 |   |
| Change in accrued interest                                                                           | ** ** | **—**         |       | 1.9 |   |
| Other                                                                                                | ** ** | **2.7**            |       | 1.5 |   |
| Net Cash Provided by Operations                                                                      | ** ** | **13.5**           |       | 24.4 |   |
| ** **                                                                                           | ** ** | ** **         | ** ** | ** ** | ** ** |
| **Cash Flow From Investing Activities**                                                              | ** ** | ** **         | ** ** | ** ** | ** ** |
| Originations of retail notes and finance  leases                                                     | ** ** | **(366.6**         | **)**      | (259.5 | ) |
| Proceeds from sales of receivables                                                                   | ** ** | **755.6**          |       | 195.0 |   |
| Proceeds from sales of retail accounts                                                               | ** ** | **100.0**          |       | 0.0 |   |
| Net change in restricted marketable  securities                                                      | ** ** | **(252.7**         | **)**      | 253.2 |   |
| Collections of retail notes and finance  lease receivables, net of change in unearned finance income | ** ** | **1.8**            |       | 25.3 |   |
| Repurchases of sold receivables (except  wholesale)                                                  | ** ** | **(39.5**          | **)**      | (64.6 | ) |
| Net change in wholesale notes and accounts  receivables                                              | ** ** | **(169.7**         | **)**      | (115.4 | ) |
| Change in amounts due from sales of  receivables                                                     | ** ** | **11.3**           |       | 19.2 |   |
| Purchase of equipment on operating leases                                                            | ** ** | **(5.8**           | )          | (5.3 | ) |
| Sale of equipment on operating leases                                                                | ** ** | **10.3**           |       | 4.0 |   |
| Receipts from derivative contracts                                                                   | ** ** | **0.2**            |       | 0.4 |   |
| Payments on derivative contracts                                                                     | ** ** | **(0.6**           | **)**      | (0.3 | ) |
| Net Cash Provided by Investing Activities                                                            | ** ** | **44.3**           |       | 52.0 |   |
|                                                                                                 |       |               |       |   |   |
| **Cash Flow From Financing Activities**                                                              | ** ** | ** **         | ** ** | ** ** | ** ** |
| Net change in bank revolving credit  facility usage                                                  | ** ** | **(14.0**          | **)**      | (72.0 | ) |
| Proceeds from long-term debt                                                                         | ** ** | **5.7**            |       | 22.5 |   |
| Principal payments on long-term debt                                                                 | ** ** | **(19.5**          | )          | (26.2 | ) |
| Dividends paid to International                                                                      | ** ** | **—**         |       | — |   |
| Net Cash Used in Financing Activities                                                                | ** ** | **(27.8**          | **)**      | (75.7 | ) |
|                                                                                                 |       |               |       |   |   |
| **Net Change in Cash and Cash Equivalents**                                                          | ** ** | **30.0**           |       | 0.7 |   |
| **Cash and Cash Equivalents, Beginning of  Period**                                                  | ** ** | **10.4**           |       | — |   |
| **Cash and Cash Equivalents, End of Period**                                                         | ** ** | **$**              | **40.4**   |   | $ | 0.7 |   |
|                                                                                                 |       |               |       |   |   |
| **Supplementary disclosure of cash flow  information:**                                              | ** ** | ** **         | ** ** |   | ** ** |
| Interest paid                                                                                        | ** ** | **$**              | **6.1**    | ** ** | $ | 9.8 | ** ** |
| Income taxes paid, net of refunds                                                                    | ** ** | **$**              | **—** | ** ** | $ | 0.3 | ** ** |

 

**See Notes to Condensed ConsolidatedFinancial Statements.**

 

4

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****                   ****BASIS OF PRESENTATION**

 

Thecondensed consolidated financial statements include the accounts of NavistarFinancial Corporation and its wholly-owned subsidiaries (“Corporation”).International Truck and Engine Corporation (“International”), which is whollyowned by Navistar International Corporation (“Navistar”), is the parent companyof the Corporation.

 

Theaccompanying unaudited financial statements have been prepared in accordancewith accounting policies described in the Corporation’s 2004 Annual Report onForm 10-K and should be read in conjunction with the disclosures therein.

 

Inthe opinion of management, these interim financial statements reflect alladjustments, consisting of normal recurring items, necessary to present fairlythe results of operations, financial condition and cash flow for the interimperiods presented. Interim results are not necessarily indicative of results tobe expected for any other interim period or for the full year.  Certain amounts in the prior period financialstatements have been reclassified to conform with current period presentations.

 

**2.****                   ****RESTATEMENT**

 

InDecember 2004, the Corporation determined the need to restate its consolidatedfinancial statements for the fiscal years 2002 and 2003, and the first threequarters of fiscal year 2004, primarily to correct the Corporation’s previousaccounting for: (i) the securitization of its retail notes and finance leasereceivables; (ii) deferred taxes related to retail note and finance leasesecuritization transactions and secured borrowings to fund operating andfinance leases; and (iii) an agreement to repurchase equipment.

 

Therestatement recognizes income from the interest-only receivables on aneffective yield basis and incorporates anticipated credit losses into theCorporation’s interest only receivables. The retained interests are recorded at fair value where the estimates offuture cash flows take into effect current business and market conditions.

 

Alsoas a part of the correction of the securitization accounting, the Corporationreviewed its tax treatment and deferred tax assets related to thesesecuritizations as well as for its secured borrowings related to operating andfinance leases.  As a result, a decreaseof $16.2 million was recorded to the deferred tax liability in 2003.  It made an additional adjustment of $11.9million to recognize a residual value guarantee in Other Assets and acorresponding increase in Other Liabilities in the Statements of ConsolidatedFinancial Condition for the repurchase of equipment.  These changes are reflected in the firstquarter adjustments to the balance sheet.

 

Asummary of the significant effects of the restatements on the consolidatedfinancial statements for the period ended January 31, 2004 is below.  The amounts below have minor differences tothe selected data included in the unaudited schedule of Quarterly FinancialInformation in the Corporation’s 2004 Annual Report on Form 10-K.  The changes represent timing within thequarters and do not change year end amounts.

 

5

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

*Income Statement Data*

 
| ** **                                      | ** ** | **Previously** | ** ** | ** **     | ** ** | **As**       | ** ** |
|-------------------------------------------------|------------|----------------|------------|----------------|------------|--------------|------------|
| **Millions of Dollars**                         | ** ** | **Reported**   | ** ** | **Adjustment** | ** ** | **Restated** | ** ** |
| Retail Notes and Finance Leases                 |       | $              | 10.8       |           | $          | 0.6          |       | $ | 11.4 |   |
| Income Related to Sales of Finance  Receivables |       | 3.3            |       | 7.1            |       | 10.4         |       |
| Servicing Income                                |       | 6.4            |       | (0.3           | )          | 6.1          |       |
| Credit, Collection and Administrative           |       | 9.1            |       | 1.9            |       | 11.0         |       |
| Income Before Taxes                             |       | 12.7           |       | 5.5            |       | 18.2         |       |
| Income Tax Expense                              |       | 4.8            |       | 2.1            |       | 6.9          |       |
| Net Income                                      |       | 7.9            |       | 3.4            |       | 11.3         |       |
| Comprehensive Income                            |       | 10.2           |       | 3.0            |       | 13.2         |       |
|                                                 |            |                |            |                |            |              |            |  |  |  |

 

*Balance Sheet Data*

 
| ** **                            | ** ** | **Previously** | ** ** | ** **     | ** ** | **As**       | ** ** |
|---------------------------------------|------------|----------------|------------|----------------|------------|--------------|------------|
| **Millions of Dollars**               | ** ** | **Reported**   | ** ** | **Adjustment** | ** ** | **Restated** | ** ** |
| Amounts Due from Sales of Receivables |       | $              | 351.9      |           | $          | (13.4        | )          | $ | 338.5 |   |
| Other Assets                          |       | 37.7           |       | 12.4           |       | 50.1         |       |
| Total Assets                          |       | 1,898.1        |       | (1.0           | )          | 1,897.1      |       |
| Net Accounts Payable to Affiliates    |       | 6.9            |       | (1.0           | )          | 5.9          |       |
| Other Liabilities                     |       | 128.8          |       | 9.0            |       | 137.8        |       |
| Retained Earnings                     |       | 212.5          |       | (16.3          | )          | 196.2        |       |
| Accumulated Other Comprehensive Loss  |       | (8.9           | )          | 7.3            |       | (1.6         | )          |
| Total Shareowner’s Equity        |       | 374.6          |       | (9.0           | )          | 365.6        |       |
|                                       |            |                |            |                |            |              |            |  |  |  |

 

**3.****             ****FINANCE RECEIVABLES**

 

Finance receivables are summarized as follows:

 
| ** **                             | ** ** | **January 31,** | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|----------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| **Millions of Dollars**                | ** ** | **2005**        | ** ** | **2004**        | ** ** | **2004**        | ** ** |
| Retail notes, net of unearned income   | ** ** | **$**           | **401.0**  |            | $          | 712.3           |       | $ | 511.1 |   |
| Finance leases, net of unearned income | ** ** | **62.4**        |       | 102.5           |       | 112.6           |       |
| Wholesale notes                        | ** ** | **118.3**       |       | 172.9           |       | 90.8            |       |
| Accounts:                              |       |            |       |            |       |            |       |
| Retail                                 | ** ** | **305.3**       |       | 209.3           |       | 286.9           |       |
| Wholesale                              | ** ** | **82.2**        |       | 78.8            |       | 84.3            |       |
| Total accounts                         | ** ** | **387.5**       |       | 288.1           |       | 371.2           |       |
|                                   |       |            |       |            |       |            |       |
| Total finance receivables              | ** ** | **969.2**       |       | 1,275.8         |       | 1,085.7         |       |
| Less: Allowance for losses             | ** ** | **3.9**         |       | 6.7             |       | 12.2            |       |
|                                   |       |            |       |            |       |            |       |
| Total finance receivables, net         | ** ** | **$**           | **965.3**  |            | $          | 1,269.1         |       | $ | 1,073.5 |   |

 

**4.****             ****ALLOWANCE FOR LOSSES**

 

The allowance for losses is summarized as follows:

 
| ** **                                | ** ** | **January 31,** | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|-------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| **Millions of Dollars**                   | ** ** | **2005**        | ** ** | **2004**        | ** ** | **2004**        | ** ** |
| Allowance for losses, beginning of period | ** ** | **$**           | **6.7**    |            | $          | 12.9            |       | $ | 12.9 |   |
| Provision for credit losses               | ** ** | **2.5**         |       | 8.2             |       | 1.1             |       |
| Net losses charged to allowance           | ** ** | **(0.6**        | **)**      | (6.6            | )          | (0.4            | )          |
| Allocated to finance receivables sold     | ** ** | **(4.7**        | **)**      | (7.8            | )          | (1.4            | )          |
|                                      |       |            |       |            |       |            |       |
| Allowance for losses, end of period       | ** ** | **$**           | **3.9**    |            | $          | 6.7             |       | $ | 12.2 |   |

 

6

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

The average outstandingbalance of impaired finance receivables was not material for the quarters endedJanuary 31, 2005 and 2004 or for the year ended October 31, 2004.  Interest income that would have beenrecognized on impaired finance receivables during the quarters ended January31, 2005 and 2004 or for the year ended October 31, 2004 was not material.

 

Balanceswith payments past due over 90 days on owned finance receivables totaled $7.5million as of January 31, 2005.

 

**5.****             ****SENIOR AND SUBORDINATED DEBT**

 

Senior and subordinated debt outstanding is summarized asfollows:

 
| ** **                                                                                | ** ** | **January 31,** | ** **  | **October 31,** | ** ** | **January 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------|-------------|-----------------|------------|-----------------|------------|
| **Millions of Dollars**                                                                   | ** ** | **2005**        | ** **  | **2004**        | ** ** | **2004**        | ** ** |
| Bank revolving credit facility, at variable  rates, due December 2005                     | ** ** | **$**           | **658.0**   |            | $          | 672.0           |       | $ | 499.0 |   |
|                                                                                      |       |            |        |            |       |            |       |
| Revolving retail warehouse facility, at  variable rates, due October 2005                 | ** ** | **500.0**       |        | 500.0           |       | 500.0           |       |
|                                                                                      |       |            |        |            |       |            |       |
| Borrowings secured by operating leases,  3.4% to 6.7%, due serially through December 2010 | ** ** | **139.4**       |        | 153.2           |       | 208.9           |       |
|                                                                                      |       |            |        |            |       |            |       |
| Convertible debt, 4.75%, due April 2009                                                   |       | —          | ** **  | **—**      |       | 179.9           |       |
|                                                                                      |       |            |        |            |       |            |       |
| Total senior and subordinated debt                                                        | ** ** | **$**           | **1,297.4** |            | $          | 1,325.2         |       | $ | 1,387.8 |   |

 

Thefailure of the Corporation and its affiliates to complete their respectiveQuarterly Reports on Form 10-Q and deliver those reports and related requiredinformation to their respective lenders by March 17, 2005, resulted in one ormore defaults under the revolving credit agreement.  On March 15, 2005, and again on April 15,2005, the Corporation received a waiver of the existing defaults under thecredit agreement.  The waivers permit theCorporation to incur additional borrowings under the agreement through April29, 2005.

 

In the event that the Corporation has not cured saiddefaults by April 29, 2005, it will no longer be able to incur additionalindebtedness under the credit agreement unless it shall have obtained asubsequent waiver.  In the event that theCorporation does not cure said defaults by May 2, 2005 (unless it shall haveobtained an additional waiver), an event of default shall have occurred underthe credit agreement and the administrative agent or the lenders will have theability to terminate the credit facility and demand immediate payment of allamounts outstanding under the credit agreement. Such a demand for payment would result in defaults under numerous othercredit facilities and other agreements of the Corporation and itsaffiliates.  The Corporation believesthat the defaults will be cured prior to the expiration of the waiver throughthe delivery of the Quarterly Reports on Form 10-Q and the related information.

 

InJune 2004, Navistar assumed from the Corporation the 4.75 percent convertiblesubordinated debt due in 2009.  Ascompensation for the assumption of this debt, the Corporation paid Navistar$170.0 million in cash.  Navistar’sassumption of the Corporation’s debt resulted in an $11.9 million increase inpaid-in capital for the Corporation.

 

7

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**6.****             ****DERIVATIVE FINANCIAL INSTRUMENTS**

 

TheCorporation uses derivative financial instruments as part of its overallinterest rate risk management strategy as further described in Footnote 14 ofthe 2004 Annual Report on Form 10-K.

 

TheCorporation manages its exposure to fluctuations in interest rates by limitingthe amount of fixed rate assets funded with variable rate debt.  This is accomplished by selling fixed ratereceivables on a fixed rate basis and by utilizing derivative financialinstruments.  These derivative financialinstruments may include forward contracts, interest rate swaps, and interestrate caps.  The fair value of theseinstruments is estimated based on quoted market prices and is subject to marketrisk as the instruments may become less valuable due to changes in marketconditions or interest rates.  TheCorporation manages exposure to counterparty credit risk by entering intoderivative financial instruments with major financial institutions that can beexpected to fully perform under the terms of such agreements.  The Corporation does not require collateralor other security to support derivative financial instruments with credit risk.  The Corporation’s counterparty creditexposure is limited to the positive fair value of contracts at the reportingdate.  As of January 31, 2005, theCorporation’s derivative financial instruments had a negative net fairvalue.  Notional amounts of derivativefinancial instruments do not represent exposure to credit loss.

 

As ofJanuary 31, 2005, the notional amounts and fair values of the Corporation’sderivative financial instruments are summarized as follows:

 
| **Inception** | ** ** | **Maturity**    | ** ** | **Instrument**       | ** ** | **Notional**              | ** ** | **Fair Value** | ** ** |
|---------------|------------|-----------------|------------|----------------------|------------|---------------------------|------------|----------------|------------|
| ** **    | ** ** | ** **      | ** ** | ** **           | ** ** | **(Millions of Dollars)** | ** ** |
| October 2000  |       | November  2012  |       | Interest  rate cap   |       | $                         | 500.0      |           | $          | (0.3 | ) |
| October 2000  |       | November  2012  |       | Interest  rate cap   |       | 500.0                     |       | 0.3            |       |
| July 2001     |       | April 2006      |       | Interest  rate swap  |       | 17.8                      |       | (0.3           | )          |
| November 2002 |       | March 2007      |       | Interest  rate swap* |       | 40.7                      |       | —         |       |
| October 2003  |       | April 2008      |       | Interest  rate swap* |       | —                    |       | 0.1            |       |
| July 2004     |       | September  2008 |       | Interest  rate swap* |       | —                    |       | —         |       |
|               |            |                 |            |                      |            |                           |            |                |            |  |  |

 

----

* Accounted for as non-hedging instruments.

 

Thefair values of all derivatives are recorded in Other Liabilities on theStatements of Consolidated Financial Condition.

 

**7.****             ****SALES OF RECEIVABLES**

 

During the first quarter offiscal 2005, the Corporation sold $756.6 million of retail notes and financeleases for a pre-tax gain of $11.1 million compared to the first quarter offiscal 2004, when the Corporation sold $195.0 million of retail notes andfinance leases for a pre-tax gain of $4.4 million.

 

The Corporation’sretained interests in the retail note sales include interest-only receivable,cash reserve, and negative carry accounts. The Corporation reassesses the fair value of the retained interests on aquarterly basis.  The fair value of theinterest-only receivable is based on updated estimates of prepayment speeds,credit losses, yields and discount rates.

 

8

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

The following table summarizes,for the quarter ended January 31, income related to sales of financereceivables:

 
| **Millions of Dollars**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Gains on sales of receivables                         | ** ** | **$**    | **11.1**   |     | $          | 4.4 |   |
| Discount accretion                                    | ** ** | **6.7**  |       | 6.1      |       |
| Fair value adjustment                                 | ** ** | **(0.2** | **)**      | (0.2     | )          |
| Derivative gains (losses)                             | ** ** | **(0.1** | **)**      | (0.3     | )          |
| Interest income from retained securities  and other   | ** ** | **0.4**  |       | 0.4      |       |
| Total income related to sales of finance  receivables | ** ** | **$**    | **17.9**   |     | $          | 10.4 |   |

 

**8.****              COMMITMENTS ANDCONTINGENCIES**

 

**Legal**

 

The Corporation is subject tovarious claims arising in the ordinary course of business, and is party tovarious legal proceedings, which constitute ordinary routine litigationincidental to the business of the Corporation. In the opinion of the Corporation’s management, none of theseproceedings or claims is material to the business or the financial condition ofthe Corporation.

 

On December 6, 2004, theCorporation announced that it would restate its financial results for fiscalyears 2002 and 2003 and the first three quarters of fiscal 2004. The Securitiesand Exchange Commission (SEC) notified the Corporation on February 9, 2005,that it was conducting an informal inquiry into the Corporation’s restatement.The SEC has advised the Corporation that the status of the inquiry was changedto a formal investigation.

 

**Leases**

 

The Corporation is obligatedunder non-cancelable operating leases for the majority of its officefacilities.  These leases are generallyrenewable and provide that property taxes and maintenance costs are to be paidby the lessee.  As of January 31, 2005,future minimum lease commitments under non-cancelable operating leases withremaining terms in excess of one year are as follows:

 

| **Twelve-month period ended  January 31,** | ** ** | **(Millions of Dollars)** | ** ** |
|--------------------------------------------|------------|---------------------------|------------|
|                                       |       |                      |       |
| 2006                                       |       | $                         | 2.2        |   |
| 2007                                       |       | 1.1                       |       |
| 2008                                       |       | 1.1                       |       |
| 2009                                       |       | 0.9                       |       |
| 2010 and beyond                            |       | 5.0                       |       |
|                                       |       |                      |       |
| Total                                      |       | $                         | 10.3       |   |

 

The Corporation doesnot have any future lease commitments under non-cancelable operating leases forperiods after December, 2015.  The totaloperating lease expense for the quarter ended January 31, 2005 and 2004 was$0.4 million and $0.2 million, respectively.

 

9

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**Guarantees of Debt**

 

The Corporationperiodically guarantees the outstanding debt of affiliates.  The guarantees allow for diversification offunding sources for the affiliates.  Asof January 31, 2005, the Corporation has multiple guarantees related toNavistar’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 guarantorin case of default.

 

The following table summarizes the borrowings as of January 31, 2005:

 
| **Type of Funding**               | ** ** | **Maturity**   | ** ** | **Amount of Guaranty**    | ** ** | **Outstanding Balance** | ** ** |
|-----------------------------------|------------|----------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | ** **     | ** ** | **(Millions of Dollars)** | ** ** |
| Revolving credit facility(2)      |       | December  2005 |       | $                         | 100.0      |                    | $          | 37.0 |   |
| Revolving credit facility(1), (3) |       | January 2008   |       | 17.8                      |       | 17.8                    |       |
| Revolving credit facility(1), (3) |       | Indefinite     |       | 21.4                      |       | 13.5                    |       |
| Revolving credit facility(1)      |       | Indefinite     |       | 17.8                      |       | 16.3                    |       |
| Revolving credit facility(1)      |       | March 2005     |       | 8.9                       |       | 8.9                     |       |
| Revolving credit facility(1)      |       | June 2005      |       | 6.7                       |       | 6.7                     |       |
| Revolving credit facility(1)      |       | June 2005      |       | 4.5                       |       | 3.8                     |       |
| Revolving credit facility(1)      |       | December  2007 |       | 10.7                      |       | 7.4                     |       |
|                              |       | Total          |       | $                         | 187.8      |                    | $          | 111.4 |   |

 

----

(1)   Peso-denominated

(2)   Revolving credit facility guaranteed jointlywith Navistar

(3)   The bank reviews the terms of this facilitymonthly.  This facility may be used foras long as all the conditions and terms are met.

 

**Guarantees of Derivatives**

 

As of January 31, 2005, the Corporation hadguaranteed derivative contracts for foreign currency forwards, interest rateswaps and cross currency swaps related to SOFOL and Arrendadora.  The Corporation is liable up to the fairmarket value of these derivative contracts only in cases of default by SOFOLand Arrendadora.

 

The following table summarizes the guaranteedderivative contracts as of January 31, 2005:

 
| ** **                                     | ** ** | ** **   | ** ** | **Outstanding**           | ** ** | **Fair**  | ** ** |
|------------------------------------------------|------------|--------------|------------|---------------------------|------------|-----------|------------|
| **Instrument**                                 | ** ** | **Maturity** | ** ** | **Notional**              | ** ** | **Value** | ** ** |
| ** **                                     | ** ** | ** **   | ** ** | **(Millions of Dollars)** | ** ** |
| Interest rate swaps and cross currency  swaps* |       | May 2007     |       | $                         | 57.7       |      | $          | 0.3 |   |
|                                                |            |              |            |                           |            |           |            |  |  |

 

----

* Peso-denominated

 

10

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**Other**

 

On November30, 2001, the Corporation completed the sale of all of the stock of HarcoNational Insurance Company (“Harco”), a wholly-owned insurance subsidiary, toIAT Reinsurance Syndicate Ltd. (“IAT”), a Bermuda reinsurance company.  As part of its sales agreement with IAT, theCorporation agreed to guarantee the adequacy of Harco’s loss reserves.  There is no limit to the potential amount offuture payments required by the Corporation related to this reserve.  The guarantee under the sales agreement isscheduled to expire November 2008.  Thecarrying amount of the Corporation’s liability under this guarantee isestimated at $0.6 million as of January 31, 2005 and is included in Other Liabilitiesin the Consolidated Statements of Financial Condition.  Management believes this reserve is adequateto cover any future potential payments to IAT.

 

11

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**ITEM 2.  MANAGEMENT****’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIALCONDITION**

 

Certain statements under this caption purelyconstitute “forward-looking statements” within the meaning of Section 27Aof the Securities Act, Section 21E of the Exchange Act, and the PrivateSecurities Litigation Reform Act of 1995 that are subject to risks anduncertainties.  Navistar FinancialCorporation’s (“Corporation”) actual results may differ significantly from theresults discussed in such forward-looking statements.  You should not place undue reliance on thosestatements because they are subject to numerous uncertainties and factorsrelating to our operations and business environment, all of which are difficultto predict and many of which are beyond our control, and such forward-lookingstatements only speak as of the date of this Form 10-Q.  Forward-looking statements includeinformation 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 similarexpressions.  These statements are basedon assumptions that we have made in light of our experience in the industry aswell as our perceptions of historical trends, current conditions, expectedfuture developments and other factors we believe are appropriate under thecircumstances.  As you read and considerthis Form 10-Q, you should understand that these statements are notguarantees of performance or results. They involve risks, uncertainties and assumptions.  Although we believe that these forward-lookingstatements are based on reasonable assumptions, you should be aware that manyfactors could affect our actual financial results or results of operations andcould cause actual results to differ materially from those in the forward-lookingstatements.  Factors that might causesuch a difference include, but are not limited to, those discussed under theheading “Business Outlook.”

 

**Restatement**

 

The accompanying management’s discussion andanalysis gives effect to the restatement of the consolidated financialstatements for the period ended January 31, 2004 as discussed in Note 2 to theConsolidated Financial Statements.

 

**Overview**

 

The Corporation was incorporated in Delawarein 1949 and is a wholly-owned subsidiary of International Truck and EngineCorporation (“International”), which is a wholly-owned subsidiary of NavistarInternational Corporation (“Navistar”). As used herein, the “Corporation” refers to Navistar FinancialCorporation and its wholly-owned subsidiaries unless the context otherwiserequires.

 

The Corporation is a commercial financingorganization that provides wholesale, retail and lease financing in the UnitedStates for sales of new and used trucks sold by International andInternational’s dealers.  The Corporationalso finances wholesale accounts and selected retail accounts receivable ofInternational.  Sales of new products(including trailers) of other manufacturers are also financed regardless ofwhether they are designed or customarily sold for use with International’struck products.

 

The Corporation also services financereceivables it originates and purchases. The Corporation’s sources of revenues are primarily from sales of itsreceivables, servicing of its sold receivables, earnings from investments,interest earned from its financing programs and payments made under wholesaleand other dealer loan financing programs.

 

The Corporation is exposed to market riskprimarily due to fluctuations in interest rates during the accumulation periodprior to a securitization sale.  Interestrate risk arises from the funding of a

 

12

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

portion of the Corporation’s fixed ratereceivables with floating rate debt.  TheCorporation has managed exposure to interest rate changes by funding floatingrate receivables with floating rate debt and fixed rate receivables with fixedrate debt, floating rate debt and equity capital.  Management has reduced the net exposure,which results from the funding of fixed rate receivables with floating ratedebt by generally selling fixed rate receivables on a fixed rate basis and byutilizing derivative financial instruments when appropriate.

 

**Off-Balance Sheet Arrangements**

 

The Corporation enters into guarantees andsales of receivables that appropriately are not reflected on its balance sheet,which have or will have an effect on its financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources.

 

*Guarantees*

 

The Corporation periodically guarantees theoutstanding debt of affiliates.  Theguarantees allow for diversification of funding sources for theaffiliates.  As of January 31, 2005, theCorporation has numerous guarantees related to Navistar’s three Mexican financesubsidiaries, Servicios Financieros Navistar, S.A. de C.V. (“SOFOL”),Arrendadora Financiera Navistar, S.A. de C.V. (“Arrendadora”) and NavistarComercial S.A. de C.V. (“Commercial”). The Corporation has no recourse as guarantor in case of default.  As of January 31, 2005, the Corporation’smaximum exposure under these guarantees is the total amount outstanding at thatdate, $111.4 million.

 

On July 30, 2004, the Corporation, throughNavistar Financial Retail Receivables Corporation (“NFRRC”), sold retail notereceivables to a conduit.  In order tomatch fund the fixed rate receivables with the variable rate debt of the conduit,the conduit entered into an interest rate swap agreement on the anticipatedcash flows from the receivables.  NFC, asservicer, has indemnified the conduit for the impact any variance in those cashflows has on the swap settlement.  As ofJanuary 31, 2005, the Corporation has not recorded any liability related tothis indemnification.

 

*Sales of Receivables*

 

The Corporation securitizes and sellsreceivables through NFRRC, Navistar Financial Securities Corporation (“NFSC”),Truck Retail Accounts Corporation (“TRAC”) and Truck Engine ReceivablesFinancing Co. (“TERFCO”), all special purpose, wholly-owned subsidiaries(“SPC’s”) of the Corporation, to fund its business operations.  The securitization market provides theCorporation with a cost-effective source of funding.  In a typical securitization transaction, theCorporation sells a pool of finance receivables to a SPC that establishes aqualifying special purpose entities (“QSPE”) consistent with the requirementsof Statements of Financial Accounting Standards (“SFAS”) No. 140“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities”.  The SPC then transfersthe receivables to the QSPE, generally a trust, in exchange for proceeds frominterest-bearing securities, commonly called asset-backed securities(“ABS”).  These securities are issued bythe QSPE and are secured by future collections on the sold receivables.  The sales of receivables in eachsecuritization constitute sales under accounting principles generally acceptedin the United States of America, with the result that the sold receivables areremoved from the Corporation’s balance sheet and the investor’s interests inthe related trust or conduit are not reflected as liabilities.

 

13

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

The Corporation often retains interests inthe securitized receivables.  Theretained interests may include senior and subordinated securities, undividedinterests in wholesale receivables, restricted cash held for the benefit of theQSPEs, and interest-only receivables. The Corporation’s retained interests willbe the first to absorb any credit losses on the sold receivables because theCorporation retains the most subordinated interests in the QSPE, includingsubordinated securities, the right to receive excess spread (interest-onlystrip) and any residual or remaining interests of the QSPE after allasset-backed securities are repaid in full. The Corporation’s exposure to credit losses on the sold receivables islimited to its retained interests. The SPC’s assets are available to satisfythe creditors’ claims prior to such assets becoming available for the SPC’s ownuses or to the Corporation or affiliated companies.  The Corporation is under no obligation torepurchase any sold receivable that becomes delinquent in payment or otherwiseis in default.  The holders of theasset-backed securities have no recourse to the Corporation or its other assetsfor credit losses on sold receivables and have no ability to require theCorporation to repurchase their securities. The Corporation does not guarantee any securities issued by QSPE’s. TheCorporation, as seller and the servicer of the finance receivables is obligatedto provide certain representations and warranties regarding thereceivables.  Should any receivables failto meet these representations and warranties, the Corporation, as servicer, isrequired to repurchase the receivables.

 

*Risks to Future Sales of Receivables*

 

The Corporation relies heavily onsecuritization for cost effective funding of its operations.  The Corporation’s ability to sell itsreceivables may be dependent on the following factors: the volume and creditquality of receivables available for sale, the performance of previously soldreceivables, general demand for the type of receivables the Corporation offers,market capacity for the Corporation sponsored investments, accounting andregulatory changes, the Corporation’s debt ratings and the Corporation’sability to maintain back-up liquidity facilities for certain securitizationprograms.  If as a result of any of theseor other factors, the cost of securitized funding significantly increased orsecuritized funding were no longer available to the Corporation, the Corporation’soperations, financial condition and liquidity could be adversely impacted.

 

**Business Outlook**

 

Navistar currently projects 2005 U.S. andCanadian Class 8 heavy truck industry demand to be 262,000 units, up 19.1% from2004.  Class 6 and 7 medium truckindustry demand, excluding school buses, is forecast at 100,000 units,unchanged from 2004.  Industry demand forschool buses is expected to be 27,500 units, up 5.0% from 2004.  Mid-range diesel engine shipments by Navistarto OEMs in 2005 are expected to be 365,400 units, 2.1% higher than 2004.  The Corporation provides financing toNavistar’s U.S. dealers and customers and would expect finance acquisitions toincrease in approximate proportion to Navistar’s activities.

 

**Critical Accounting Policies**

 

Theconsolidated financial statements are prepared in conformity with accountingprinciples generally accepted in the United States of America.  The preparation of these financial statementsrequires the use of estimates, judgments, and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the periodspresented.  In preparing these financialstatements, management has made its best estimates and judgments of certainamounts included in the financial statements, giving due consideration to

 

14

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

materiality.  The significant accounting principles which managementbelieves are the most important to aid in fully understanding the Corporation’sfinancial results are:

 

•                  Sales of Receivables

•                  Allowance for Losses

•                  Net Investment in Equipment on Operating Leases

•                  Repossessions

•                  Pension and Other Post Retirement Benefits

 

Details regarding the Corporation’s use ofthese policies and the related estimates are described in the Corporation’s2004 Annual Report on Form 10-K.  Therehave been no material changes to these policies.

 

**Results of Continuing Operations**

 

*First Quarter 2005 Compared with FirstQuarter 2004*

 

Net income was $19.1 million for the firstquarter of 2005, compared with $11.3 million for the first quarter of2004.  The net income increase of $7.8million is mainly due to higher sales of receivables.  During the first quarter of fiscal 2005, theCorporation sold $756.6 million of retail notes and leases for a pre-tax gainof $11.1 million, compared with the first quarter of fiscal 2004 when theCorporation sold $195.0 million of retail receivables for a pre-tax gain of$4.4 million.  Higher receivables salesvolume reflects a timing difference.

 

The total income related to sales of financereceivables increased from $10.4 million in the first quarter of 2004 to $17.9million in the first quarter of 2005. This increase was primarily attributable to the higher gain on sales ofreceivables described above.

 

While the Corporation has been experiencinglower past due finance receivables balances, it experienced $0.6 million in netlosses during the first quarter of fiscal 2005, compared with $0.4 million inthe same period of fiscal 2004. The allowance for losses is maintained at anamount management considers appropriate in relation to the outstandingportfolio 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 2005, theCorporation’s net retail notes and finance leases originations were $366.6million, compared with $259.5 million during the same period of fiscal2004.  Net serviced retail note andfinance lease balances were $2,714.4 million and $2,500.5 million as of January31, 2005 and 2004, respectively.  TheCorporation’s finance market share of new International trucks sold in the U.S.increased to 16.1% at January 31, 2005, compared to 14.9% at January 31, 2004.

 

Wholesale note originations were $1,152.8million for the first quarter of fiscal 2005, compared with $821.1 million forthe same period of fiscal 2004.  Servicedwholesale note balances were $1,212.1 million and $889.0 million as of January31, 2005 and 2004, respectively.  Theincrease in wholesale note balances and originations reflects an increase inInternational deliveries to its U.S. dealers.

 

15

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

The Corporation has seen an improvement inits truck repossession activities.  Theserviced repossession balance decreased significantly from $19.0 million, as ofJanuary 31, 2004, to $12.7 million, as of January 31, 2005.  Improved portfolio performance resulted inlower acquisitions of repossessed vehicles.

 

**Funds Management**

 

The Corporation has traditionally obtainedthe funds to provide financing to International’s dealers and retail customersfrom sales of finance receivables, commercial paper, short and long-term bankborrowings, and medium and long-term debt. The Corporation’s current debt ratings have made sales of financereceivables the most economical source of funding.

 

*Credit Ratings*

 

The Corporation’s debt ratings as of January31, 2005 are as follows:

 
| ** **             | ** ** | **Fitch** | ** ** | **Moody’s** | ** ** | **Standard  and Poor’s** |
|------------------------|------------|-----------|------------|------------------|------------|-------------------------------|
| Senior  unsecured debt |       | BB        |       | Ba3              |       | BB-                           |
| Subordinated  debt     |       | B+        |       | B2               |       | B                             |
| Outlook                |       | Stable    |       | Stable           |       | Stable                        |

 

*Funding Facilities*

 

Receivable sales are a significant source offunding.  Through the asset-backed publicmarket and private placement sales, the Corporation has been able to fund fixedrate retail notes and finance leases at rates, which are more economical thanthose available to the Corporation in the public unsecured bond market.  The Corporation sells retail notes andfinance leases through Navistar Financial Retail Receivables Corporation(“NFRRC”), a special purpose, wholly-owned subsidiary of the Corporation.

 

During the first quarters of 2005 and 2004,the Corporation sold $750.0 million and $195.0 million, respectively, of retailnotes and finance leases to an owner trust which, in turn, issued asset-backedsecurities that were sold to investors. As of January 31, 2005, the remaining shelf registration available toNFRRC for the public issuance of asset-backed securities was $3,250.0 million.

 

Truck Engine Receivables FinancingCorporation, a special purpose, wholly-owned subsidiary of the Corporation, hasin place a trust that provides for the funding of $100.0 million of unsecuredtrade receivables generated by the sale of diesel engines and engine serviceparts from International to Ford Motor Company. The facility matures in November 2005. As of January 31, 2005, the Corporation had utilized $100.0 million ofthis facility.

 

Truck Retail Accounts Corporation (“TRAC”), aspecial purpose, wholly—owned subsidiary of the Corporation, provides financingfor its retail accounts with a bank conduit that provides for the funding of upto $100.0 million of eligible retail accounts. The revolving retail account facility expires in August 2005.  The transfer of retail accounts under TRACconstitute sales under generally accepted accounting principles in the UnitedStates of America, with the result being sold accounts are removed from theCorporation’s balance sheet and the investor’s interests are not reflected asliabilities.  As of January 31, thisfacility was fully utilized.

 

16

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

Navistar Financial Securities Corporation, aspecial purpose, wholly-owned subsidiary of the Corporation, has in place arevolving wholesale note trust that provides for the funding of up to $1,423.0million of eligible wholesale notes.  Asof January 31, 2005, it was comprised of a $200.0 million tranche of investorcertificates maturing in 2008, three $212.0 million tranches of investorcertificates maturing in 2005, 2006 and 2007, and variable funding certificates(“VFC”) with a maximum capacity of $400.0 million, which matures in December2005.  As of January 31, 2005, theCorporation had utilized $1,093.9 million of the revolving wholesale note trust.

 

Truck Retail Installment Paper Corporation, aspecial purpose wholly-owned subsidiary of the Corporation, issued $500.0million of senior and subordinated floating rate asset-backed notes on October16, 2000.  The proceeds were used toestablish a revolving retail warehouse facility to fund the Corporation’sretail notes and retail leases, other than fair market value leases, during theaccumulation period prior to a receivable sale. There were $246.9 million in retail notes and leases at the end of thefirst quarter 2005, compared with $316.1 million in retail notes and leases asof January 31, 2004.

 

International Truck Leasing Corporation(“ITLC”), a special purpose, wholly-owned subsidiary of the Corporation, wasestablished to provide for the funding of certain leases.  In fiscal 2005, $12.8 million has been fundedthrough this subsidiary.  This subsidiarywas not present at January 31, 2004. ITLC’s assets are available to satisfy its creditors’ claims prior tosuch assets becoming available for ITLC’s uses or to the Corporation oraffiliated companies.

 

The Corporation also has $820.0 millioncontractually committed to bank revolving credit facility that will mature inDecember 2005.  As of January 31, 2005,$695.0 million of this facility was utilized, including $37.0 million used byNavistar’s Mexican finance subsidiary.

 

As of January 31, 2005, the aggregateavailable to fund finance receivables under all the various facilities was$744.4 million.

 

The failure of the Corporation and itsaffiliates to complete their respective Quarterly Reports on Form 10-Q anddeliver those reports and related required information to their respectivelenders by March 17, 2005, resulted in one or more defaults under the revolvingcredit and TRAC agreements.  On March 15,2005 and again on April 15, 2005, the Corporation received a waiver of theexisting defaults under the agreements. The waivers permit the Corporation to incur additional borrowings underthe agreements through April 29, 2005.

 

In the event that the Corporation has notcured said defaults by April 29, 2005, it will no longer be able to incuradditional indebtedness under the agreements unless it shall have obtained asubsequent waiver.  In the event that theCorporation does not cure said defaults by May 2, 2005 (unless it shall haveobtained an additional waiver), an event of default shall have occurred underthe credit agreement and the administrative agent or the lenders will have theability to terminate the credit facility and demand immediate payment of allamounts outstanding under the credit agreement. Such a demand for payment would result in defaults under numerous othercredit facilities and other agreements of the Corporation and its affiliates.  The Corporation believes that the defaults willbe cured prior to the expiration of the waiver through the delivery of theQuarterly Reports on Form 10-Q and the related information.

 

17

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

*Funding Facilities*

 

The weighted average borrowing rate on alldebt outstanding for the first quarter of fiscal 2005 decreased to 3.3% from3.5% for the same period in 2004.  Thedecrease in the Corporation’s weighted average borrowing rate is primarily aresult of convertible debt assumed by Navistar.

 

Management believes that collections on theoutstanding finance receivables portfolio plus cash available from theCorporation’s various funding sources will permit the Corporation to meet thefinancing requirements of International’s dealers and retail customers through2005 and beyond.

 

**New Accounting Pronouncements**

 

In March 2004, the Emerging Issues Task Force(“EITF”) reached a final consensus on EITF 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to CertainInvestments.”  In September 2004, theFASB issued FSP EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF 03-1which deferred the effective date of paragraphs 10-20 of EITF 03-1.  EITF 03-1 paragraph 21 requires specificdisclosure for all investments in an unrealized loss position for which otherthan temporary impairments have not been recognized.  The Corporation included this disclosure inFootnote 15 Sales of Receivables in its 2004 Annual Report on Form 10-K.

 

18

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**ITEM 4****.  CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

The Corporation’s principal executive officer and principal financialofficer, along with other management of the Corporation, reviewed and testedthe Corporation’s disclosure controls and procedures (as defined in rule13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended(“the Exchange Act”)) as of January 31, 2005. Based on that evaluation, the principal executive officer and principalfinancial officer of the Corporation concluded that, as of January 31, 2005,there were material weaknesses in the Corporation’s disclosure controls andprocedures related to (1) a misapplication of GAAP related to securitizationaccounting and an associated lack of timely resolution of outstandingreconciling items in certain collection accounts; and (2) the lack ofsufficient specialized securitization accounting personnel.  The 2004 Form 10-K was filed February 15,2005 and the misapplication of GAAP and resolution of outstanding reconcilingitems was corrected as of that date.

 

The Corporationrestated its financial statements for the two fiscal years ended October 31,2003 and 2002 in its 2004 Form 10-K.  TheCorporation is restating its interim periods for 2004 in its 2005 quarterlyreports.

 

The principal executive officer and principal financial officer of theCorporation concluded, based on the weaknesses noted above, as of January 31,2005, the disclosure controls and procedures in place at the Corporation werenot effective.

##### ** **

##### **Changes in Internal Controls**

##### ** **

In connection with the ongoing review of theCorporation’s internal controls over financial reporting (as defined in rule13a-15(f) and 15d-15(f) under the Exchange Act) and in response to the materialweaknesses identified, the Corporation has increased executive managementeducation in securitization accounting, made improvements to its securitizationaccounting reconciliation process and added additional levels of review in itsfinancial reporting processes.  Management has strengthened its controls and procedures over theapplication of accounting standards, accessed external resources knowledgeablein securitization accounting and is in the process of adding internalaccounting personnel.

 

19

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**PART II****– OTHER INFORMATION**

 

# **ITEM 1.   LEGAL** PROCEEDINGS

 

The Corporation issubject to various claims arising in the ordinary course of business, and isparty to various legal proceedings, which constitute ordinary routinelitigation incidental to the business of the Corporation.  In the opinion of the Corporation’smanagement, none of these proceedings or claims is material to the business orthe financial condition of the Corporation.

 

On December 6, 2004,the Corporation announced that it would restate its financial results forfiscal years 2002 and 2003 and the first three quarters of fiscal 2004. TheSecurities and Exchange Commission (SEC) notified the Corporation on February9, 2005, that it was conducting an informal inquiry into the Corporation’srestatement. The SEC has advised the Corporation that the status of the inquirywas changed to a formal investigation. The Corporation currently is not able topredict the final outcome of the investigation. It continues to cooperate with the SEC’s requests.

 

There was no othermaterial pending legal proceeding other than routine litigation incidental tothe business of the Corporation.

 

**ITEM 5.  OTHER****INFORMATION**

 

Theunaudited Restated 2004 quarterly financial information in the Corporation’s2004 Annual Report filed on Form 10-K has been modified for minor adjustmentsbetween the quarters.  The affect ofthese adjustments is reflected in the Form 10-Q and Exhibit 99.1 to theCorporation’s Form 8-K filed on April 14, 2005.

 

QUARTERLY FINANCIAL INFORMATION(unaudited)

 

 
| ** **                  | ** ** | **Restated 2004 Reported in the 2004 Form 10-K** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|
| **Millions of Dollars**     | ** ** | **1STQuarter**                                   | ** ** | **2NDQuarter** | ** ** | **3RDQuarter** | ** ** | **4THQuarter** | ** ** | **Fiscal  Year** | ** ** |
|                        |       |                                             |       |   |   |   |   |   |   |   |   |
| Results                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Revenues                    |       | $                                                | 51.8       |   | $ | 71.0 |   | $ | 53.3 |   | $ | 63.0 |   | $ | 239.1 |   |
| Interest expense            |       | 11.7                                             |       | 11.4 |   | 8.8 |   | 9.0 |   | 40.9 |   |
| Provision for credit losses |       | 1.1                                              |       | 3.3 |   | 2.1 |   | 1.7 |   | 8.2 |   |
| Net income                  |       | 9.1                                              |       | 20.6 |   | 12.4 |   | 19.0 |   | 61.1 |   |
|                             |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | **Restated 2004 Reported Herein** | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------|------------|-----------------------------------|------------|----------------|------------|----------------|------------|
| ** **                  | ** ** | **And in Form 8-K**               | ** ** | ** **     | ** ** | ** **     | ** ** |
| **Millions of Dollars**     | ** ** | **1STQuarter**                    | ** ** | **2NDQuarter** | ** ** | **3RDQuarter** | ** ** | **4THQuarter** | ** ** | **Fiscal  Year** | ** ** |
|                        |       |                              |       |           |       |           |       |   |   |   |   |
| Results                     |       |                              |       |           |       |           |       |   |   |   |   |
| Revenues                    |       | $                                 | 54.9       |           | $          | 69.7           |       | $ | 54.7 |   | $ | 59.8 |   | $ | 239.1 |   |
| Interest expense            |       | 11.7                              |       | 11.4           |       | 8.8            |       | 9.0 |   | 40.9 |   |
| Provision for credit losses |       | 1.1                               |       | 3.3            |       | 2.1            |       | 1.7 |   | 8.2 |   |
| Net income                  |       | 11.3                              |       | 20.2           |       | 13.7           |       | 15.9 |   | 61.1 |   |
|                             |            |                                   |            |                |            |                |            |  |  |  |  |  |  |  |  |  |

 

**ITEM 6.  EXHIBITS****AND REPORTSON FORM 8-K**

 

(a)   Exhibits:

 
| 3      | Articles  of Incorporation and By-Laws                                        |   |
|--------|-------------------------------------------------------------------------------|--------|
|   |                                                                          |   |
| 4      | Instruments  Defining Rights of Security Holders, including Indentures        |   |
|   |                                                                          |   |
| 10     | Material  Contracts                                                           |   |
|   |                                                                          |   |
| 31.1   | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002  |   |
|   |                                                                          |   |
| 31.2   | CFO  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |   |
|   |                                                                          |   |
| 32.1   | CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002  |   |
|   |                                                                          |   |
| 32.2   | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002  |   |

 

20

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

(b)         TheCorporation filed the following reports on Form 8-K during the quarter endedJanuary 31, 2005.

 

TheCorporation filed a current report on Form 8-K with the Commission on December6, 2004, in which the Corporation announced the non-reliance of its previouslyfiled financial statements covering periods 2002 through 3rd quarter 2004 andthe restatement of these periods.

 

TheCorporation filed a current report on Form 8-K with the Commission on January7, 2005, in which the Corporation announced the delay of its Form 10-K filingfor the fiscal year ended October 31, 2004 beyond the filing deadline ofJanuary 14, 2005.

 

TheCorporation filed a current report on Form 8-K with the Commission on January31, 2005, in which the Corporation announced it defaulted under theCorporation’s $820,000,000 Credit Agreement related to the delay of its Form10-K filing for the fiscal year ended October 31, 2004.

 

21

----

 

**NAVISTAR FINANCIAL CORPORATION**

**AND SUBSIDIARIES**

 

**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|   |           | Navistar Financial Corporation |                           |
|--------|----------------|--------------------------------|--------------------------------|
|   |           | (Registrant)                   |                           |
|   |           |                           |                           |
|   |           |                           |                           |
| Date   | April 19, 2005 |                           | /s/ Paul Martin                |   |
|   |           |                           | Paul Martin                    |
|   |           |                           | Vice President and Controller  |
|   |           |                           | (Principal Accounting Officer) |
|        |                |                                |                                |  |  |  |  |

 

22

----