Navistar International (NAV) 11-KAnnual report of employee stock purchases

We have audited the accompanying statements of net assets available for benefits of Navistar, Inc. Retirement Accumulation Plan (the “Plan”) as of December 31, 2019 and 2018, the related statement of changes in net assets available for benefits for the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 2019 and 2018, and the changes in net assets available for benefits for the year ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on the Plan’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Plan in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Plan is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Plan’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

The schedule of assets (held at end of year) as of December 31, 2019 ("supplemental information"), has been subjected to audit procedures performed in conjunction with the audit of the Plan’s financial statements. The supplemental information is the responsibility of the Plan’s management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. In our opinion, the supplemental information is fairly stated, in all material respects, in relation to the financial statements as a whole.

The following description of the Navistar, Inc. Retirement Accumulation Plan (the “Plan”) is provided for general information purposes only. Participants should refer to the Plan document for more complete information.

The Plan is sponsored by Navistar, Inc. (the “Company”), the principal operating subsidiary of Navistar International Corporation (“Navistar”), to provide savings and retirement benefits for certain eligible salaried and hourly employees of the Company and of certain affiliates participating under the Plan. The Plan was established January 1, 1996, and has subsequently been amended to maintain qualification under Sections 401(a), 401(k) and 501 of the Internal Revenue Code of 1986, as amended (the “IRC”) and to modify the provisions of the Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

Prior to July 1, 2009, participation in the Plan was limited to those eligible salaried employees of the Company whose initial hire date was on or after January 1, 1996 and to eligible salaried employees of certain affiliates. Effective July 1, 2009, participation includes those participants whose accounts were merged into the Plan, regardless of their initial date of hire.

New employees are automatically enrolled in the Plan at an employee pretax contribution rate of 6% of eligible compensation.  In general, such automatic enrollment will be effective the first pay period following the hire date, unless the employee elects to participate earlier or elects to opt out of enrollment until a future date.

The Plan permits, but does not require, the Company or its affiliates to make matching and retirement contributions. Such contributions are subject to a vesting schedule based upon the participant’s length of employment, and fully vest upon completion of five years of service. For those participants who are eligible for such matching contributions, the Company currently matches 50% of the first 6% of eligible compensation deferred as combined pretax and/or Roth contributions by the participant. Additional compensation deferred by a participant who is age 50 or older is not matched by the Company. Retirement contributions are allocated to eligible participants and are calculated as a percentage of eligible compensation, based on the participant’s age.

Company match contributions must be deposited at least annually; however, effective January 1, 2019, Company match contributions changed from being deposited annually to being deposited monthly without regard to whether the employee was employed by the Company as of the last day of that month or of that Plan year. Retirement contributions are deposited into participant accounts on an annual basis, as soon as administratively practical after the close of the Plan year. A participant who has terminated employment prior to the end of the calendar year for any reason except death, involuntary termination or “retirement” as defined under the Plan, will not receive any Company retirement contributions for that year.

Participant and Company contributions are subject to the combined annual addition limitation of IRC Section 415. Such limit is monitored throughout the Plan year.

Participants may borrow from their fund accounts a minimum of $1,000 up to the lesser of 50% of their pretax, Roth, after-tax and rollover account balance or $50,000, with no more than two loans outstanding at a time. Company matching and retirement contributions are not available for loans. Loan transactions are treated as a transfer between the applicable investment funds and the loan fund. Loan terms range from one to five years, with the exception of loans made for the purchase of a principal residence, which may be repaid in installments over a period of up to ten years. The loans are secured by the balance in the participant’s account and bear interest at a rate equal to prime as of the date of loan origination, plus one percentage point.

Participants may request either an in-service or hardship withdrawal of certain assets in their account. Participants may only withdraw authorized pretax and Roth salary reduction contributions after attaining age 59 ½, or on a hardship basis prior to attaining age 59 ½. Effective January 1, 2019, participants may also withdraw earnings on authorized pretax and Roth salary reduction contributions after attaining age 59 ½, or on a hardship basis prior to attaining age 59 ½. Company matching and retirement contributions and investment earnings thereon are not eligible for in-service withdrawal.

If the vested balance is more than $5,000, the participant has the option of receiving the account upon separation or deferring commencement until a later date. If the participant elects to receive a check and the check remains uncashed after 120 days, the Plan administrator will notify the participant that the check remains uncashed. Following an administrative period, if the check remains uncashed, the check will be void and the funds will be rolled over to an individual retirement plan designated by the Plan administrator. If the participant elects to defer commencement, the deferral generally cannot go beyond April 1 of the calendar year following the year in which the participant attains age 70 ½ or retires, whichever is later. At that time, the participant must begin to receive a required minimum distribution. Accounts are distributed in a single sum prior to this date, or may be distributed at this date as a lump sum or a required minimum distribution. Effective on or after August 1, 2019, accounts may also be distributed as partial lump sums for those who are not subject to a mandatory distribution, subject to rules and limits established by the plan administrator in its discretion.

Certain Plan administrative expenses are paid by the Company and are not reflected in the Plan’s financial statements. All other administrative expenses of the Plan are paid by the Plan and charged to the participants’ accounts.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. Entities are required to adopt the guidance retrospectively for all periods presented. The Plan retrospectively adopted the guidance for the Plan year ending December 31, 2019. The adoption of the guidance did not have a material impact on the financial statements and it expanded the disclosures in Note C - Interest in Master Trust.

Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term, and that such changes could materially affect the amounts reported in the financial statements.

The Plan follows guidance on accounting for fair value measurements which defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value. The Plan uses a three-level hierarchy of measurements based upon the reliability of observable and unobservable inputs used to arrive at fair value. Observable inputs are independent market data, while unobservable inputs reflect the Plan management’s assumptions about valuation. Depending on the inputs, the Plan classifies each fair value measurement as follows:

The following describes the methods and significant assumptions used to estimate fair value of the Plan’s investments:

The Plan’s interest in the Navistar, Inc. Defined Contribution Plans Master Trust (“Master Trust”) is presented at fair value, which has been determined based on the fair value of the underlying investments of the Master Trust.

The investments held by the Master Trust are valued as follows:

Security transactions are accounted for on the trade-date basis. Dividend income is accrued on the ex-dividend date. Interest income is recorded on the accrual basis. Net realized and unrealized appreciation (depreciation), along with dividend income and interest income (excluding notes receivables from participants) are recorded in the accompanying statement of changes in net assets available for benefits as change in Plan's interest in Master Trust.

Great West Trust Company, LLC (the “Trustee”) is the trustee for the Plan. All of the Plan’s investment assets are held in a trust account at the Trustee and consist of a divided interest in an investment account of the Master Trust, a master trust established by the Company and administered by the Trustee. Use of the Master Trust permits the commingling of Plan assets with the assets of another defined contribution plan sponsored by the Company and its affiliated companies for investment and administrative purposes. Although assets of the plans are commingled in the Master Trust, the Trustee maintains supporting records for the purpose of allocating the net gain or loss of the investment account to the participating plans. The net investment income or loss of the investment assets is allocated by the Trustee to each participating plan based on the relationship of the interest of each plan to the total of the interests of the participating plans.

The collective trusts generally provide daily redemption with written notice with the exception of the JPMCB Stable Asset Income Fund (the "JPMCB Fund") valued at $129,163,221 and $122,561,049 at December 31, 2019 and 2018, respectively, and the target date funds valued at $253,225,794 at December 31, 2018 (the target date funds are mutual funds as of December 31, 2019).

Participants can ordinarily direct the withdrawal or transfer of all or a portion of their investment in the JPMCB Fund at contract value. Certain events may limit the JPMCB Fund's ability to transact at contract value. Such events may include plan termination, bankruptcy and other events outside the normal operation of the JPMCB Fund that may cause a withdrawal which results in a negative market value adjustment. The Plan may terminate its interest in the JPMCB Fund at any time. However, requests received for complete or partial withdrawals must be given in writing not less than 30 days prior to the valuation date, upon which the withdrawal is to be effected, and such withdrawals shall be paid at the lesser of book or market value, as determined by the JPMCB Fund.

Although the Company expects to continue the Plan indefinitely, the Company, at its discretion, reserves the right to amend, modify, suspend or terminate the Plan, provided that no such action shall deprive any person of any rights to contributions made under the Plan. If the Plan is terminated or contributions thereto have been completely discontinued, the rights of all participants to the amounts credited to their accounts shall be non-forfeitable and the interest of each participant in the funds will be distributed to such participant or his or her beneficiary in accordance with the Plan terms and ERISA. If the Plan is terminated, Plan participants will become fully vested in any funds allocated to them.

The SECURE Act, which was signed into law on December 20, 2019, changed the required minimum distribution age from 70 ½ to 72 for participants who turn age 70 ½ on or after January 1, 2020.

In response to the pandemic outbreak of a novel coronavirus (COVID-19), the United States Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to provide expanded access to retirement plan accounts. Effective April 23, 2020, the Plan adopted provisions under the CARES Act related to distributions, loans and deferred loan repayments for those participants who qualify under the CARES Act.

Related to the COVID-19 pandemic, the Company match contributions will be delayed until 2021, effective March 1, 2020.

As disclosed in its Form 8-K filed on January 31, 2020, on January 30, 2020 Navistar received an unsolicited proposal from TRATON SE, which is approximately 90% owned by Volkswagen AG, regarding a potential transaction to acquire all the outstanding shares of Navistar that it does not already own for $35.00 per share in cash. Consistent with its fiduciary duties, the Navistar Board of Directors, in consultation with its financial and legal advisors, is carefully reviewing and evaluating the proposal in the context of its strategic plan for Navistar in order to determine the course of action that Navistar believes is in the best interest of Navistar and its stakeholders.

On March 23, 2020, the TRATON Group issued a press release in conjunction with the release of its Annual Report indicating that the COVID-19 pandemic prevents it from providing any reliable guidance regarding business performance in 2020. As of the date hereof, the TRATON Group’s proposal has not been withdrawn. Developments arising since the date the TRATON Group’s proposal was made may impact the likelihood and terms of any transaction, including, without limitation, developments relating to the COVID-19 pandemic. There can be no assurance that any definitive, binding proposal will be made, that any agreement will be executed or that the transaction contemplated by the proposal or any other transaction will be approved or consummated. Until Navistar enters into, or declares that it will not enter into, a definitive agreement with respect to the transaction contemplated by the TRATON Group’s offer or any alternative transaction, the value of the Plan’s interest in Navistar common stock in the Master Trust may change to reflect market assumptions as to whether any transaction is likely to occur.