Corporate Governance

Letter From Our President and Chief Executive Officer

To stockholders, employees and customers

ceo

While 2020 marks a year when the economy and trucking industry were severely impacted by the COVID-19 pandemic, I am very proud of how the Navistar family more than rose to the challenge to keep America moving.

At the end of the year, we reached an exciting agreement to merge with TRATON SE that will deliver many benefits and enable our company and its brands to aim even higher in the future.

Rapid Actions Assured Viability During Pandemic

Responding quickly to the global COVID crisis, Navistar took decisive action to protect our people so that we could fulfill our duty, as an essential business, to keep our assembly plants running and our parts distribution centers in operation. Our employees performed heroically, finding innovative ways to support our customers while operating safely. In turn, our customers and dealers kept the economy moving by delivering essential goods and services to our communities.

We also took appropriate action to assure the company’s financial viability during the crisis. We retimed our capital expenditures and spending where possible; deferred a portion of the base salary of U.S.-based, non-represented employees; and achieved savings from provisions of the CARES Act. These actions conserved over $300 million in cash for the year, without impairing our ability to accomplish our long-term goals.

In addition, Navistar completed the issuance of $600 million in senior secured notes to enhance liquidity and stabilize the balance sheet during the pandemic. Moving forward, the company is now looking to convert many of these cash-conservation actions to sustainable, long-term cost savings opportunities as part of the company’s journey to lower its cost structure.

Continued Progress Toward Long-Term Business Goals

Despite challenges from the pandemic, Navistar generated $7.5 billion in revenue, adjusted EBITDA of $420 million and adjusted net income of $10 million, and finished the year with $1.75 billion in manufacturing cash.

Due to the broad economic disruption created by the pandemic year, we have retargeted the financial goals of our Navistar 4.0 strategy as growing adjusted EBITDA margins to 10% by 2023 and to 12% by 2025. Strong momentum in the second half of the year puts Navistar in position to accomplish these goals.

Acceleration of Our Navistar 4.0 Progress

Navistar 4.0 is our enterprise-wide strategy with customers at its core. In 2020, we accelerated our Navistar 4.0 focus and created seven strategic initiatives that guide decision-making and investments. During the year, we made tangible progress in each of these areas.

  • Commercial Transformation: As we worked more closely with our International dealer network to sustainably grow truck sales, our team demonstrated progress on several fronts. For the second year in a row, our school bus business ended the year #1 in market share; in fact, the bus business improved its industry leadership position. Our market share in severe service increased steadily throughout the year. While softness in the rental and leasing segment temporarily impacted our medium and heavy-duty market share, we are beginning to see signs of strengthening orders in this segment.
  • Uptime/Total Cost of Ownership/Connected: These critical measures of customers’ success are enabled by Navistar’s multiple industry-leading technology capabilities. This year, we consolidated our position as the North America market leader in connected services. We now have partnerships in place with seven leading telematics providers that enable customers to avoid hardware installation costs by using Navistar’s own factory-installed device. In addition, we launched Intelligent Fleet Care, the industry’s most comprehensive standard suite of connected vehicle solutions, which is standard for new on-highway vehicles ordered starting in December.
  • Emerging Technologies: Using strategic partnerships and targeted investments, we moved rapidly to deliver broad-based solutions in electric, autonomous and other advanced technologies that complement our own A26 engine and our new supply agreement with Cummins. Our recent electric school bus tour opened up new market opportunities in California, and we will deliver electric vehicles, including electric medium-duty trucks, to customers in 2021. Our NEXT eMobility Solutions business unit is partnering with In-Charge Energy to provide charging infrastructure and consulting services to electric vehicle customers, and is delivering a full electrification solution, including charging, route planning and infrastructure, to a school bus customer in British Columbia. We also entered a strategic partnership with TuSimple, a global self-driving technology company, to co-develop SAE Level 4 self-driving trucks targeted for production by 2024.
  • Project Compass: This initiative reduces unnecessary complexity while meeting customer needs. This year we launched the first new product from this initiative, the new International® HX® Series, our most comfortable, durable, technologically integrated and driver-focused severe service truck ever. Looking forward, we are on a pace to announce a new product every six months for the next three years.
  • Manufacturing 4.0: We are making significant progress on major new infrastructure projects that will transform our manufacturing and supply footprint. In February, we broke ground on our $125 million investment in our Huntsville, Ala., plant, where we will produce our next generation of big-bore powertrains, developed in alliance with TRATON. In June, we broke ground on our new San Antonio, Texas, manufacturing facility, a more than $250 million investment that allows for significant logistics improvements and a consolidation of the company’s supply base. The new facility will incorporate the latest manufacturing principles: digital factory, connected machinery, robust lean manufacturing processes and cloud analytics. These new approaches will enable predictive quality and maintenance, and allow data-driven decisions to be made on the shop floor in real time. We are on track to begin producing vehicles at the San Antonio plant by spring 2022.
  • Innovation: This initiative focuses on embedding innovation into our company identity while identifying opportunities for new products and services. The initiative has created a new innovation learning experience for employees that is already generating innovative ideas. The ultimate goal is to foster a culture of curiosity, problem-solving and breakthrough thinking that builds and grows new businesses and sources of revenue at Navistar.
  • People 4.0: We are expanding our culture of trust, empowerment and accountability to build the best teams and deliver superior solutions and results. It is providing new tools for learning and leadership that will strengthen leaders’ capabilities as coaches, mentors and role models, while also upskilling and reskilling employees, empowering teams and improving our organizational velocity. We have also reinforced these Navistar 4.0 initiatives through major leadership changes and enterprise-wide training that will accelerate the pace of our progress.
Moving Forward with TRATON

At the conclusion of the fiscal year, we took a major step towards merging with TRATON. Once approved, the combination will form the world’s second-largest commercial vehicle maker, with the scale, scope and vision necessary to thrive in the future industry. The merger will accelerate our growth, as we secure access to new technologies, products and services while taking advantage of synergies of scale through the combined brands under TRATON.

The accomplishments achieved in 2020 have positioned Navistar well for the future. While responding to the pandemic, we stayed the course, advancing our Navistar 4.0 initiatives for long-term growth. We continued to invest in our business and products, and pressed ahead with important strategic partnerships in emerging technologies. We also improved the way we do business, transforming the company across the board.

In short, we have already achieved financial health and strength as an independent company. Looking forward, the exciting opportunity with TRATON will build further on this foundation, accelerating our progress and delivering long-term, sustainable benefits.

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Persio V. Lisboa

President and CEO