2014 Third Quarter Results
CNH INDUSTRIAL THIRD QUARTER REVENUES OF $7.7 BILLION, NET INCOME OF $162 MILLION
FINANCIAL RESULTS UNDER U.S. GAAP(*) (**)
- Third quarter revenues totaled $7.7 billion ($8.2 billion in Q3 2013). Net sales of Industrial Activities were $7.4 billion in Q3 2014 ($7.9 billion in Q3 2013).
- Operating profit of Industrial Activities for the quarter was $522 million, down 12.9% compared to Q3 2013, with operating margin at 7.1% (down 0.5 p.p.).
- Net income was $162 million in Q3 2014, or $0.13 per share. Net income before restructuring and other exceptional items was $214 million (or $0.16 per share), down $63 million compared to Q3 2013.
- Net industrial debt was $3.9 billion at September 30, 2014 ($3.7 billion at June 30, 2014). Available liquidity totaled $7.9 billion ($7.7 billion at June 30, 2014), after the issuance of a €700 million bond ($881 million) due September 2021.
- 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) – (October 30, 2014) CNH Industrial N.V. (NYSE:CNHI / MI:CNHI) today announced consolidated revenues of $7,739 million for the third quarter of 2014, down 5.2% compared to Q3 2013. Net sales of Industrial Activities were $7,403 million in Q3 2014, down 6.0% from Q3 2013. Net sales increases in Construction Equipment and Powertrain were more than offset by declines in Agricultural Equipment, due to challenging trading conditions in the agricultural row crop sector, particularly in NAFTA and LATAM regions, and Commercial Vehicles.
Operating profit of Industrial Activities was $522 million in Q3 2014, a 12.9% decrease compared to Q3 2013, with an operating margin for the third quarter of 7.1%, down 0.5 p.p. from Q3 2013. Operating profit improved in Construction Equipment, Powertrain and Commercial Vehicles in the quarter. Construction Equipment benefitted from improved trading conditions in the NAFTA and EMEA regions, positive price realization, and actions from the Company’s Efficiency Program. Positive performance in EMEA for Commercial Vehicles was partially offset by the negative effects of challenging trading conditions in LATAM, due to a significant decline in market demand. In Agricultural Equipment, lower unit volume with a negative product mix in the row crop sector, and increased manufacturing costs as a result of cuts in production run rates, were partially offset by positive net price realization during the quarter.
Restructuring expenses totaled $56 million, compared to $3 million for Q3 2013, as part of the Efficiency Program announced in July 2014. Agricultural Equipment recorded $28 million primarily due to the closure of a 60% owned joint venture in China. Commercial Vehicles recorded $22 million mainly due to actions to reduce selling, general and administrative (“SG&A”) expenses and business support costs as a result of the transition to CNH Industrial’s regional structure. Construction Equipment recorded $6 million mainly due to the repositioning of the Case and New Holland brand offerings and the consequent alignment of their dealer networks.
Interest expense, net totaled $150 million for the quarter, $22 million higher than Q3 2013, primarily due to an increase in average net industrial debt, partially offset by more favorable interest rates.
Other, net was a charge of $97 million for the quarter ($65 million for Q3 2013). The increase of $32 million was mainly due to higher foreign exchange losses, which included an $8 million pre-tax charge for the re-measurement of Venezuelan assets denominated in bolivares.
Income taxes totaled $107 million, representing an effective tax rate of 41.3% for the quarter, substantially in line with Q3 2013 (effective tax rate of 41.8%). 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 $10 million for the quarter ($22 million for Q3 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 $75 million for the quarter compared to $65 million for Q3 2013, mainly as a result of higher average portfolio value and lower income taxes, partially offset by higher provisions for credit losses.
Consolidated net income was $162 million for the quarter ($275 million for Q3 2013). Net income attributable to CNH Industrial N.V. was $173 million for the quarter ($223 million for Q3 2013), or $0.13 per share ($0.18 for Q3 2013), and was positively impacted by losses attributed to minority interest holder related to the closure of the joint venture in China. Net income before restructuring and other exceptional items (a non-GAAP measure) was $214 million for the quarter ($277 million in Q3 2013).
Net industrial debt of $3.9 billion at September 30, 2014 was $0.2 billion higher than at June 30, 2014, as a slowdown of activity, mainly in Agricultural Equipment and Commercial Vehicles, resulted in a $0.6 billion reduction in payables at the end of the quarter. Currency translation differences on euro-denominated debt positively affected net industrial debt by $0.4 billion.
Available liquidity at September 30, 2014 was $7.9 billion, inclusive of $2.5 billion in undrawn committed facilities ($2.3 billion at June 30, 2014), compared to $7.7 billion at June 30, 2014. The increase is mainly attributable to the proceeds from the €700 million bond issued by CNH Industrial Finance Europe S.A., due September 2021, with a fixed rate coupon of 2.875%, partially offset by cash utilized in operating activities and by negative currency translation differences.
2014 U.S. GAAP Guidance
Despite challenging trading condition in the agricultural row crop sector, particularly in NAFTA, and the generally depressed markets in LATAM in agricultural equipment and commercial vehicles, CNH Industrial is confirming its 2014 U.S. GAAP guidance 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.
2015 U.S. GAAP Outlook
Full year 2014 operating profit to be held in 2015. Improved profitability in Commercial Vehicles and Construction Equipment, coupled with productivity actions and structural cost improvement measures from the Company’s Efficiency Program are expected to offset projected challenging conditions in the row crop sector of the agricultural business.
CNH Industrial expects that trading conditions in Agricultural Equipment will remain challenging through 2015, largely concentrated in the harvesting and high horsepower row crop sectors in the NAFTA and LATAM regions. The Company has already begun to take actions in 2014 to align its cost structure and its inventory positions to protect segment margins in this portion of the business. Despite the headwinds in the row crop sector of the agricultural industry as a result of declines in commodity prices, the Company is forecasting that reduced input costs will continue to benefit the livestock and dairy sectors of the agricultural industry through 2015.
In the commercial vehicle segment, the EMEA and LATAM regions are forecast to be flat in unit volume overall, and for trading conditions to remain challenging. Actions taken in the Company’s Efficiency Program to reduce its cost structure, as well as improved manufacturing productivity and reduced Euro VI related launch costs will contribute to improved year over year segment profitability in 2015.
In Construction Equipment, the Company expects to continue to improve profitability in 2015 on the back of improved trading conditions in NAFTA and EMEA, and the full year realization of the Company Efficiency Program begun in 2014.
Powertrain activities expect the headwind of reduced volume demand in Agricultural Equipment will be offset by increased third party sales and manufacturing productivity improvements.
Net sales for Agricultural Equipment were $3,659 million for the quarter, down 11.6% from Q3 2013, driven by lower volumes and less favorable product mix, partially offset by positive net pricing. The geographic distribution of net sales for the period was 46% NAFTA, 27% EMEA, 15% LATAM and 12% APAC.
Worldwide agricultural equipment industry unit sales were down during the third quarter of 2014, with global demand for tractors down 1% and combines down 22%. In NAFTA, tractor demand was up 10%, largely concentrated in the lower horsepower segment (under 140 hp) on improved demand in the dairy & livestock and hay & forage sectors, while combines were down 23%. In EMEA, tractor and combine markets were down 7% and 24%, respectively. LATAM tractor and combine markets decreased 10% and 16%, respectively. In APAC, demand decreased 2% for tractors and 23% for combines.
Agricultural Equipment’s worldwide market share performance was flat for tractors with decreased market share in NAFTA and EMEA offset by an increase in APAC. Combine market share decreased in all markets except for LATAM.
Production of Agricultural Equipment was 10% above retail sales for the quarter as lower retail sales across all regions more than offset the slowdown in production (down 6% vs. last year and down 12% vs. Q2 2014). The Company expects to significantly under-produce retail demand in the last quarter of the year.
Agricultural Equipment’s operating profit was $433 million for the quarter ($582 million in Q3 2013). Operating margin was 11.8% (14.1% in Q3 2013), with negative volume and mix (primarily for high horsepower tractors and combines in NAFTA) and increased manufacturing costs being partially offset by net price realization.
In September the Company announced the definitive agreement to acquire substantially all of the assets of precision spraying equipment manufacturer Miller-St. Nazianz, Inc. These assets will become part of the New Holland brand, providing a strong platform to grow the self-propelled sprayer business on a global scale. The agreement is subject to customary closing conditions, with the goal of closing before the end of the year.
Net sales for Construction Equipment were $841 million for the quarter, up 14.7%, with increases in all regions, especially NAFTA. The geographic distribution of net sales for the period was 44% NAFTA, 19% EMEA, 28% LATAM and 9% APAC.
In the third quarter of 2014, heavy equipment industry sales were down 13% and light equipment industry sales were up 3% compared to the prior year. For both heavy and light equipment, the industry saw continued softening of demand in LATAM and APAC, which was partially offset by recovering markets in NAFTA and EMEA.
Construction Equipment’s worldwide market share performance was flat overall for light equipment, with heavy equipment market share increasing in all regions, especially NAFTA and LATAM.
Production levels were 9% above retail sales, as industry demand continues to recover.
Construction Equipment reported operating profit of $39 million compared to an operating loss of $31 million for Q3 2013, with an operating margin of 4.6%, as a result of pricing strength in NAFTA, LATAM and APAC, positive volume and mix in all regions and continued containment actions in SG&A and research and development (“R&D”) expenses as a result of the realization of the Company’s brand re-alignment initiatives and global excavators strategy.
Net sales for Commercial Vehicles were $2,522 million, a decrease of 6.2% compared to Q3 2013. Increased net sales in EMEA driven by light and heavy vehicles, despite lower deliveries in the bus business due to the transition to Euro VI applications, were more than offset by a significant decrease in LATAM (-29%), as a result of continued overall weak economic conditions. Production adjustments in LATAM continued during the quarter to allow for dealer inventories to be aligned to market demand. The geographic distribution of net sales for the period was 72% EMEA, 19% LATAM and 9% APAC.
Commercial Vehicles delivered a total of 28,897 vehicles (including buses and specialty vehicles), representing an 8.2% decrease from Q3 2013. Volumes were higher in the light segment (+2.6%) as a result of the launch of the new Daily, while volumes declined in the heavy (-10.3%) and medium (-29.6%) segments driven by weak trading conditions in LATAM and pre-Euro VI demand in H2 2013 in EMEA. Commercial Vehicles deliveries increased 7.7% in EMEA, while APAC was down 14% and LATAM 45% (with Brazil down approximately 48% and Argentina down approximately 36%).
The European truck market (GVW ≥3.5 tons) grew by 4.3% compared to Q3 2013 to approximately 158,400 units. Light vehicles (GVW 3.5-6 tons) increased by 11.1%, while medium vehicles market (GVW 6.1-15.9 tons) and heavy vehicles market (GVW >16 tons) decreased by 15.2% and 1.8%, respectively.
The Company’s market share in the European truck market (GVW ≥3.5 tons) is estimated to be 10.2%, a decrease of 0.5 p.p. In the light segment, the share is estimated to be 10.0% (down 1.0 p.p.), mainly due to the transition to the new Daily, launched in June and the first results of which appeared in the registrations of September. In the medium segment, the Company’s market share increased by 2.2 p.p. to 26.6% and in the heavy segment was up 0.2 p.p. to 7.1%.
In LATAM, new truck registrations (GVW ≥3.5 tons), at 47,200 units, were down 22.5% compared to Q3 2013. The largest decrease was registered in Venezuela, down 79.5%, while Argentina was down 33.6% and Brazil decreased by 15.0%.
The Company’s share of the LATAM market (GVW ≥3.5 tons) was down 1.4 p.p. from Q3 2013 to 9.8%. Market share increased by 1.0 p.p. and 0.5 p.p. respectively in light and medium segments, while market share declined 2.9 p.p. in the heavy segment.
In APAC, registrations decreased by 7.6% and market share was down 0.2 p.p. compared to Q3 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 third quarter with an operating profit of $20 million compared to an operating profit of $15 million for Q3 2013. Positive volume in EMEA, primarily in light and heavy trucks, favorable pricing exceeding product content cost increase, savings on R&D expenses, and lower SG&A expenses, were partially offset by losses in LATAM, including negative fixed-cost absorption in manufacturing plants, due to continued depressed markets across the region and inventories realignment actions, particularly in Brazil.
Net sales for Powertrain were $1,025 million in the third quarter, an increase of 1.8% compared to Q3 2013, primarily attributable to higher volumes. Sales to external customers accounted for 39% of total net sales (33% in the same period in 2013).
During the quarter, Powertrain sold a total of 133,304 engines, an increase of 3.2% compared to Q3 2013. By major customer, 25% of engines were supplied to Agricultural Equipment, 25% to Commercial Vehicles, 5% to Construction Equipment and the remaining 45% to external customers (units sold to third parties were up 20% compared to Q3 2013). Additionally, Powertrain delivered 14,112 transmissions and 37,514 axles, an increase of 8% and 9%, respectively, compared to the same period in 2013.
Powertrain closed the third quarter with an operating profit of $59 million, up $9 million from the same period in 2013, with an operating margin of 5.8% (5.0% for Q3 2013). The improvement was mainly due to the increase in volumes and related industrial efficiencies.
Financial Services reported third quarter revenues of $455 million, an increase of 9.4% compared to Q3 2013, primarily driven by the increase in the average value of the portfolio.
Financial Services reported net income of $75 million, up $10 million over the same period in 2013, mainly due to higher average portfolio value and lower income taxes, partially offset by higher provisions for credit losses.
Retail loan originations in the quarter were $2.8 billion, flat compared to Q3 2013. The managed portfolio (including joint ventures) of $28.1 billion (of which retail was 64% and wholesale 36%) was down $1.0 billion compared to June 30, 2014, flat excluding currency impact.
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 $7,817 million for the third quarter of 2014, a decrease of 5.1% from the same quarter in 2013.
Consolidated trading profit was $570 million for the third quarter, down $104 million or 15.4% from Q3 2013. Trading margin for the third quarter decreased 0.9 p.p. to 7.3%. Agricultural Equipment trading profit was $398 million ($545 million in Q3 2013), with a trading margin of 10.9% (13.2% for Q3 2013). Construction Equipment reported a trading profit of $29 million (trading loss of $40 million in Q3 2013) with a trading margin of 3.4%. Commercial Vehicles closed the third quarter with a trading profit of $2 million (trading profit of $25 million for Q3 2013, with a trading margin of 0.9%). Powertrain reported a trading profit of $52 million, compared to $47 million for Q3 2013, with a trading margin of 5.1% (4.7% for Q3 2013). Financial Services trading profit was $117 million ($115 million in the same period in 2013).
Profit before taxes totaled $326 million ($533 million for Q3 2013), down $207 million. The decline was mainly due to the $104 million reduction in trading profit, the $50 million increase in net unusual expenses mainly associated with higher restructuring costs, as part of the Efficiency Program announced in July 2014, and increased net financial expenses. The increase of $40 million in net financial expenses is attributable to higher average net industrial debt, higher foreign exchange losses, which included an $8 million pre-tax charge for the re-measurement of Venezuelan assets, partially offset by more favorable interest rates. Results from investments declined by $13 million to $12 million, due to reduced results from APAC joint ventures.
Income taxes for the third quarter totaled $92 million ($204 million for Q3 2013), representing an effective tax rate of 28.2% for the quarter. The decrease from the 38.3% Q3 2013 effective tax rate is mainly due to recognizing deferred tax assets in certain jurisdictions. The Company’s 2014 forecast effective tax rate on an IFRS-basis is still expected to be in the range of 36% to 40%.
Consolidated net profit was $234 million, or $0.18 per share, compared to $329 million, or $0.22 per share for Q3 2013.
Net industrial debt of $4.1 billion at September 30, 2014 was $0.3 billion higher than at June 30, 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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