2014 Second Quarter Results
CNH INDUSTRIAL SECOND QUARTER REVENUES OF $8.9 BILLION, NET INCOME OF $358 MILLION
FINANCIAL RESULTS UNDER U.S. GAAP(*) (**)
- Second quarter revenues totaled $8.9 billion ($8.8 billion in Q2 2013). Net sales of Industrial Activities at $8.6 billion ($8.5 billion in Q2 2013).
- Operating profit of Industrial Activities for the quarter was $678 million, down 1.2% compared to Q2 2013, with operating margin at 7.9% (down 0.1 p.p.).
- Net income was $358 million in Q2 2014, or $0.26 per share. Net income before restructuring and other exceptional items was $382 million, or $0.28 per share, up $14 million compared to Q2 2013.
- Net industrial debt was $3.7 billion at June 30, 2014 ($4.0 billion at March 31, 2014). Available liquidity totaled $7.7 billion ($8.1 billion at March 31, 2014), after the issuance of a July 2019 $500 million bond.
- Full year guidance confirmed.
(*) Beginning with the filing with the U.S. Securities and Exchange Commission (“SEC”) of its annual report on Form 20-F for the fiscal year ended December 31, 2013, prepared in accordance with U.S. GAAP, CNH Industrial reports quarterly and annual financial results both under U.S. GAAP for SEC reporting purposes and under IFRS for European listing purposes and Dutch law requirements. Financial statements under both sets of accounting principles use the U.S. dollar as the reporting currency. In addition, as disclosed in the Form 20-F, CNH Industrial has expanded its reportable segments from three (Agricultural and Construction Equipment inclusive of its financial services activities, Trucks and Commercial Vehicles inclusive of its financial services activities, and Powertrain) to five (Agricultural Equipment, Construction Equipment, Commercial Vehicles, Powertrain and Financial Services). The following tables and comments on the financial results of the Company and by segments are prepared in accordance with U.S. GAAP. Financial results under IFRS are shown in a subsequent section of this press release. Prior period results under IFRS, prepared in euro, have been consistently recast into U.S. dollars. A summary outlining the Company’s transition to U.S. GAAP and the U.S. dollar as the reporting currency is available on the Company’s website, www.cnhindustrial.com.
(**) Refer to the Non-GAAP Financial Information section of this press release for information regarding Non-GAAP financial measures.
Basildon (UK) – (July 31, 2014) CNH Industrial N.V. (NYSE:CNHI / MI:CNHI) today announced consolidated revenues of $8,911 million for the second quarter of 2014, up 0.9% compared to Q2 2013. Net sales of Industrial Activities were $8,564 million in Q2 2014, marginally up on the prior year. Net sales increased in Powertrain, offsetting declines in Agricultural Equipment (primarily in LATAM and in NAFTA) and slight decreases in Construction Equipment and Commercial Vehicles.
Operating profit of Industrial Activities was $678 million in Q2 2014, a 1.2% decrease compared to Q2 2013 with an operating margin for the second quarter of 7.9%, in line with Q2 2013. Operating profit improvements in Construction Equipment, Powertrain and Commercial Vehicles in EMEA were offset by the negative effects of poor trading conditions in Commercial Vehicles in LATAM, due to a significant decline in market demand, and by negative volume and mix for Agricultural Equipment, primarily in NAFTA and LATAM.
Restructuring expenses totaled $30 million, $10 million higher than Q2 2013, and relate in part to Construction Equipment, as a result of the announced closure of the Company’s Calhoun, Georgia, USA facility, and in part to Commercial Vehicles.
Interest expense, net totaled $158 million for the quarter, $16 million higher than Q2 2013, primarily due to an increase in average net industrial debt, partially offset by more favorable interest rates.
Income taxes totaled $158 million, representing an effective tax rate of 32.6% for the quarter. The decrease from the 41.9% Q2 2013 effective tax rate is mainly due to the favorable resolution of tax audits for which specific provisions had been made and lower losses in jurisdictions where such losses cannot be book benefitted. The Company’s effective tax rate for the year is still expected to be in the range of 40% to 44% due to the inability to recognize the tax benefit of losses in certain jurisdictions.
Equity in income of unconsolidated subsidiaries and affiliates totaled $31 million for the quarter ($41 million for Q2 2013). The decrease was mainly due to lower results from APAC joint ventures, primarily as a result of lower industry volumes in China.
Net income of Financial Services was $105 million for the quarter compared to $96 million for Q2 2013, mainly as a result of higher levels of activity and lower income taxes.
Consolidated net income was $358 million for the quarter ($348 million for Q2 2013), or $0.26 per share ($0.23 for Q2 2013). Net income before restructuring and other exceptional items (a non-GAAP measure) was $382 million for the quarter ($368 million in Q2 2013).
Net industrial debt of $3.7 billion at June 30, 2014 was $0.3 billion lower than at March 31, 2014, as cash flow generated from operating activities of $0.8 billion, including a positive change in working capital, was partially offset by a $0.4 billion dividend payment and $0.2 billion capital expenditure activity.
Available liquidity at June 30, 2014 was $7.7 billion, inclusive of $2.3 billion in undrawn committed facilities, compared to $8.1 billion at March 31, 2014. The decrease is mainly attributable to the dividend payment mentioned above, as well as cash utilized to support portfolio growth for the financial services activities, partially offset by the proceeds from the $500 million bond issued at the end of June by CNH Industrial Capital LLC, due July 2019, with a fixed rate coupon of 3.375%.
The Company has decided to launch a comprehensive efficiency program designed to enhance efficiency and competitiveness of its Industrial Activities.
The program is expected to result in a total cumulative charge of approximately $280 million over the next three years, with a non-cash impact of approximately 20%. The majority of the restructuring charges are expected to impact the statement of operations in 2014 and 2015. Benefits from this program are expected as early as the second half of 2014, with annualized savings of approximately $160 million by the end of 2016.
Restructuring actions in the Agricultural Equipment segment are mainly related to the closure of a joint venture as the business model is no longer viable in the current environment.
Actions identified by Construction Equipment are related to the re-tooling of its industrial footprint in connection with the recently announced enlargement of the licensing agreements with Sumitomo (S.H.I.) Construction Machinery Co., Ltd, as well as the re-positioning of Case and New Holland brand offerings and the consequent alignment of their dealer networks. The recently announced closure of the assembly plant in Calhoun, Georgia, represents one of those actions.
Commercial Vehicles actions will focus on SG&A expenses and business support costs as a result of the transition to CNH Industrial’s regional structure, as well as on the completion of manufacturing product specialization programs.
2014 U.S. GAAP Guidance
CNH Industrial is confirming its 2014 U.S. GAAP guidance, consistent with the 5-year plan financial projections presented at the Investor Day on May 8th, as follows:
· Net sales of Industrial Activities at approximately $32 billion;
· Operating profit of Industrial Activities between $2.1 billion and $2.2 billion, with margin between 6.5% and 6.9%;
· Net industrial debt between $2.2 billion and $2.1 billion at the end of 2014;
· Consolidated net income before restructuring between $0.9 billion and $1.0 billion, with earnings per share before restructuring between $0.69 and $0.74.
Net sales for Agricultural Equipment were $4,436 million for the quarter, down 2.3% from Q2 2013, driven by lower volumes, primarily in LATAM and NAFTA, as well as less favorable product mix, partially offset by net pricing. The geographic distribution of net sales for the period was 43% NAFTA, 37% EMEA, 10% LATAM and 10% APAC.
Worldwide agricultural equipment industry unit sales were down during the second quarter of 2014, with global demand for tractors and combines down approximately 12%. In NAFTA, tractor demand was up 1%, with the under 40 hp segment up 4% and the over 40 hp segment down 2%, while combines were down 20%. In EMEA, tractor and combine markets were down 7% and 9%, respectively. LATAM tractor and combine markets decreased 12% and 30%, respectively. In APAC, demand decreased 16% for tractors and was flat for combines.
Market share performance was mainly flat for tractors, except for LATAM where there was a slight decrease. Combines market share decreased in all markets except for NAFTA, where it was flat.
Production of Agricultural Equipment was 6% above retail sales for the quarter, to support normal seasonality and in anticipation of the facilities’ summer shutdown schedules. The Company expects to under-produce retail demand in the second half of the year.
Agricultural Equipment operating profit was $632 million for the quarter ($646 million in Q2 2013). Operating margin remained at 14.2%, with negative volume and mix (primarily large horsepower tractors and combines in NAFTA) being offset by pricing and cost control actions to recover Tier 4B related content costs, inflation and adverse foreign exchange movements.
Net sales for Construction Equipment were $931 million for the quarter, down 0.9%, as higher demand in NAFTA was offset by a decrease in market volumes in LATAM and APAC. The geographic distribution of net sales for the period was 43% NAFTA, 19% EMEA, 29% LATAM and 9% APAC.
Industry volumes were down 10% and 2% in heavy and light, respectively, in the second quarter of 2014 compared to the prior year. Decreased industry volumes in LATAM and APAC were partially offset by growth in NAFTA and EMEA.
Worldwide Construction Equipment market share performance was flat overall.
Production levels were 12% above retail sales, as the industry in NAFTA and EMEA began to recover.
Construction Equipment reported operating profit of $28 million compared to $13 million for Q2 2013, with an operating margin of 3.0% (1.4% for Q2 2013), as a result of continued price resilience in NAFTA and LATAM and cost containment actions, partially offset by negative volume and mix.
In June the Company announced that it will close its assembly plant in Calhoun, Georgia, USA in the third quarter of 2015. The closure is due to the Company’s announced transition to a single excavator partner, and is part of the business footprint optimization program which is a key pillar to achieving the 5-year operating profit target.
Commercial Vehicles posted second quarter net sales of $2,704 million, flat with prior year. Increased deliveries in EMEA were partially offset by a significant decrease in LATAM and a decrease in deliveries in the bus business due to the transition to Euro VI applications. APAC net sales benefited from better mix due to increased heavy vehicle sales. LATAM net sales significantly decreased due to sharp market declines across the region, as a result of overall weak economic conditions and a deterioration in the terms of subsidized financing. Production has been reduced to allow for dealer inventories to be aligned to market demand. The geographic distribution of net sales for the period was 75% EMEA, 16% LATAM and 9% APAC.
Commercial Vehicles delivered a total of 33,057 vehicles (including buses and specialty vehicles), representing a 3.6% decrease over Q2 2013. Volumes were higher in the light segment (+3.4%), while volumes declined in the heavy (-3.3%) and medium (-25.2%) segments. Commercial Vehicles deliveries increased 10% in EMEA and 2% in APAC, while LATAM was down 44% (Brazil down approximately 34%, Argentina down approximately 57% and Venezuela suspending operations as announced in April 2014).
The European truck market (GVW ≥3.5 tons) was up 3.1% over Q2 2013 to approximately 175,500 units. Light vehicles (GVW 3.5-6 tons) increased 7.7%, while the medium vehicles market (GVW 6.1-15.9 tons) and the heavy vehicles market (GVW >16 tons) decreased 14.8% and 1.1%, respectively.
The Company’s second quarter market share in the European truck market (GVW ≥3.5 tons) was estimated at 11.0%, a decline of 0.3 p.p., mainly due to negative market mix and the transition to the new Daily, launched in June. In the light segment the share declined by 0.8 p.p. to 11.0%. In the medium vehicles segment the Company’s market share increased by 3.0 p.p. to 27.9%. Heavy vehicle market share was up 0.5 p.p. to 7.3%.
In LATAM, new truck registrations (GVW ≥3.5 tons), at 45,800 units, were down 22.8% compared with Q2 2013. The largest decrease was registered in Venezuela (-81.7%), while Argentina was down 35.1% and Brazil decreased 12.8%.
The Company’s share of the LATAM market (GVW ≥3.5 tons) was down 1.3 p.p. from Q2 2013 to 9.3%.
In APAC registrations were down 6.2% and market share decreased 0.1 p.p. compared with Q2 2013.
In EMEA, dealer inventories of new vehicles remained stable compared to year-end 2013, representing coverage of approximately three months of expected retail activity.
Commercial Vehicles closed the second quarter with an operating loss of $21 million compared to a loss of $11 million for Q2 2013. Positive volume, mix and pricing in both light and heavy vehicles in EMEA, favorable product mix in APAC, and lower selling, general and administrative expenses as a result of continued cost containment actions were more than offset by losses in LATAM, including negative fixed-cost absorption in manufacturing plants, and by Euro VI transition costs in the bus business and costs associated with the rampup of production related to new products.
Powertrain reported second quarter net sales of $1,250 million, an increase of 13.6% over Q2 2013 primarily attributable to higher volumes. Sales to external customers accounted for 41% of total net sales (33% in the same period in 2013).
During the quarter, Powertrain sold a total of 160,418 engines, an increase of 18% year-over-year. By major customer, 25% of engines were supplied to Agricultural Equipment, 24% to Commercial Vehicles, 5% to Construction Equipment and the remaining 46% to external customers (units sold to third parties were up 35% over Q2 2013). Additionally, Powertrain delivered 18,298 transmissions and 44,138 axles, an increase of 3% and 6%, respectively, compared to the same period in 2013.
Powertrain closed the second quarter with an operating profit of $64 million, up $10 million from the same period in 2013, with an operating margin of 5.1% (4.9% for Q2 2013). The improvement was mainly due to the increase in volumes and related industrial efficiencies.
Financial Services reported second quarter revenues of $468 million, an increase of 13.0% compared to Q2 2013, primarily driven by the increase in the average value of the portfolio.
Financial Services reported net income of $105 million, up $9 million over the same period in 2013, mainly due to higher average portfolio value and lower income taxes.
Retail loan originations in the quarter were $2.7 billion, flat compared to Q2 2013. The managed portfolio (including joint ventures) of $29.1 billion (of which retail was 65% and wholesale 35%) was up $1.4 billion compared to March 31, 2014 (of which retail was up $0.4 billion and wholesale was up $1.0 billion).
FINANCIAL RESULTS UNDER IFRS (*)
(*) Refer to the Non-GAAP Financial Information section of this press release for information regarding Non-GAAP financial measures. Prior period results prepared in euro have been consistently recast into U.S. dollar.
On an IFRS basis, CNH Industrial posted net revenues of $9,008 million for the second quarter of 2014, an increase of 1.0% from the same quarter in 2013.
Consolidated trading profit was $801 million for the second quarter, down $27 million or -3.3% from Q2 2013. Trading margin for the second quarter decreased 0.4 p.p. to 8.9%. Agricultural Equipment trading profit was $611 million ($627 million in Q2 2013), with a trading margin of 13.8%, in line with Q2 2013. Construction Equipment reported a trading profit of $34 million ($12 million in Q2 2013) with a trading margin of 3.7% (1.3% for Q2 2013). Commercial Vehicles closed the second quarter with a trading loss of $39 million (trading profit of $8 million for Q2 2013). Powertrain reported a trading profit of $65 million, compared to $53 million for Q2 2013, with a trading margin of 5.2% (4.8% for Q2 2013). Financial Services trading profit was $146 million ($144 million in the same period in 2013).
Profit before taxes totaled $607 million ($693 million for Q2 2013), down $86 million. The decline was mainly due to the $27 million reduction in trading profit, the $20 million increase in net unusual expenses associated with higher restructuring costs and higher net financial expenses. The increase of $26 million in net financial expenses is attributable to higher average net industrial debt and higher foreign exchange losses, partially offset by more favorable interest rates. Results from investments declined by $13 million to $30 million, due to reduced results from APAC joint ventures.
Income taxes for the second quarter totaled $204 million ($264 million for Q2 2013), representing an effective tax rate of 33.6% for the quarter. The decrease from the 38.1% Q2 2013 effective tax rate is mainly due to the favorable resolution of tax audits for which had been provided for in prior periods. The Company’s 2014 forecast effective tax rate is still expected to be in the range of 36% to 40%.
Consolidated net profit was $403 million, or $0.29 per share, compared with $429 million, or $0.29 per share for Q2 2013.
Net industrial debt of $3.8 billion at June 30, 2014 was $0.2 billion lower than at March 31, 2014.
2014 IFRS Guidance
CNH Industrial is confirming its 2014 IFRS guidance, consistent with the 5-year plan financial projections presented at the Investor Day on May 8th, as follows:
- Consolidated revenues at approximately $34 billion;
- Consolidated trading profit between $2.6 billion and $2.7 billion;
- Net industrial debt between $2.2 billion and $2.1 billion at the end of 2014;
- Consolidated net income before restructuring between $1.1 billion and $1.2 billion.
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