CNH Industrial N.V. — 2014 Form 20-F
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; separate Q4 results are not clearly provided. Figures are in U.S. dollars unless indicated otherwise. Financial statements are prepared under U.S. GAAP.
Business context
CNH Industrial designs, manufactures, sells and finances agricultural and construction equipment, commercial vehicles, buses, specialty vehicles and powertrain products. Its five segments are Agricultural Equipment, Construction Equipment, Commercial Vehicles, Powertrain and Financial Services. The 2013 merger of Fiat Industrial and CNH Global affects comparisons and the attribution of earnings to the parent.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $32.555 billion | $33.836 billion |
| Net sales | $31.196 billion | $32.632 billion |
| Net income | $708 million | $828 million |
| Net income attributable to CNH Industrial | $710 million | $677 million |
| Basic and diluted EPS | $0.52 | $0.54 |
| Operating profit (company-defined, non-GAAP) | $2.199 billion | $2.277 billion |
| Cash provided by operating activities | $681 million | $1.522 billion |
| Cash used in investing activities | $1.959 billion | $3.788 billion |
| Cash provided by financing activities | $1.365 billion | $2.616 billion |
| Cash and cash equivalents at year-end | $5.163 billion | $5.567 billion |
| Total assets | $51.913 billion | $53.843 billion |
| Equity | $4.961 billion | $4.955 billion |
| Consolidated debt | $29.594 billion | $29.866 billion |
Restricted cash was $978 million, bringing cash plus restricted cash to $6.141 billion. Net debt, a non-GAAP measure, was $23.418 billion; net debt of Industrial Activities was $2.691 billion, while Financial Services net debt was $20.727 billion. Financial Services debt largely funds its lending and leasing portfolio. The company reported an Industrial Activities cost of goods sold ratio of 81.8% of net sales, versus 81.3% in 2013.
Segment operating profit (company-defined, non-GAAP): Agricultural Equipment $1.770 billion; Construction Equipment $79 million; Commercial Vehicles $29 million; Powertrain $223 million; Financial Services $554 million. Agricultural Equipment’s operating margin was 11.6%, down from 12.0%; Powertrain’s was 5.0%, up from 4.2%; Commercial Vehicles’ was 0.3%, down from 0.7%.
Material changes versus 2013
- Total revenue decreased 3.8% (2.1% on a constant-currency basis); Industrial Activities net sales fell 4.5% (2.8% constant currency).
- Net income decreased $120 million, while parent-attributable net income rose $33 million, partly reflecting the post-merger attribution of earnings to parent shareholders.
- Operating profit declined 3.4%. Agricultural Equipment profit fell 11.9%, and Commercial Vehicles profit fell 60.8%; Construction Equipment returned to profit from a 2013 loss, and Powertrain and Financial Services improved.
- Agricultural Equipment revenue declined 9.3%, particularly in LATAM and NAFTA. Commercial Vehicles revenue fell 3.5%, with a 31.4% decline in LATAM. Construction Equipment revenue increased 2.7%, and Powertrain revenue increased 1.2%.
- Operating cash flow fell $841 million, chiefly amid working-capital outflows. Cash declined by $404 million, including a $491 million negative foreign-exchange translation effect.
- Restructuring expenses increased to $184 million from $71 million. SG&A and R&D expenses fell, while interest expense increased to $1.318 billion from $1.196 billion.
Outlook, commentary, risks and unusual items
- Management said available cash, operating cash flow, financing sources and liquidity facilities were expected to cover working capital, capital expenditures and debt service at least through the end of 2015. The filing does not provide a clear numerical earnings or revenue forecast.
- A three-year Industrial Activities efficiency program launched in July 2014 is expected to generate cumulative charges of approximately $280 million, about 20% non-cash. Benefits began affecting performance in Q3 2014; most charges were expected in 2014 and 2015. Actions include restructuring, dealer-network changes and planned closures, including the Calhoun, Georgia assembly plant.
- In 2014, CNH recorded a $71 million pre-tax Venezuelan currency remeasurement charge after changing the exchange rate used for its Venezuelan Commercial Vehicles operations to 12.0 bolivars per U.S. dollar. It reported $125 million of net monetary assets in Venezuela at that rate and cited restrictions on currency conversion and transfers.
- Iveco received a European Commission Statement of Objections in a truck-industry antitrust investigation. The Commission indicated it would seek significant fines; CNH could not predict the outcome or estimate a potential fine.
- CNH remains jointly liable with FCA for certain pre-2011 obligations, approximately $3.5 billion at year-end, including $3.2 billion of bonds guaranteed by FCA. Management considered FCA insolvency risk extremely remote and recorded no specific provision.
- Defined-benefit pension, healthcare and other post-employment plans had a combined funded-status deficit of $2.595 billion. Management also flagged sensitivity to economic cycles, agricultural demand and weather, dealer and customer credit, ABS-market access, interest and currency rates, supply disruptions, regulation, and competition.
- Consolidated debt was substantial and the company’s ratings were below investment grade. Committed credit lines expiring after 12 months totaled $2.7 billion. A new €1.75 billion five-year revolving credit facility was entered into in November 2014, replacing a €2.0 billion facility.
- The board recommended a €0.20-per-common-share dividend, approximately €271 million, subject to shareholder approval in April 2015. The company reported no impairment in its 2014 annual goodwill review, but Construction Equipment’s estimated fair value exceeded carrying value by approximately 18%, which management identified as a higher-risk reporting unit.
Most important facts for investors to verify
- Whether the decline in Industrial Activities cash generation and the working-capital outflow are temporary, and how cash conversion develops.
- Whether Agricultural Equipment and Commercial Vehicles demand, especially in LATAM and higher-horsepower agriculture products, stabilizes and segment margins recover.
- Progress, total cost and realized savings from the $280 million efficiency program and announced facility and dealer-network actions.
- Financial Services credit-loss trends, receivable quality, funding access and reliance on securitization markets; financing receivables included $650 million of written-down balances.
- Any development, provision or financial impact from the EU antitrust investigation, environmental matters and the potential joint liabilities with FCA.
- Venezuelan currency restrictions, exchange-rate changes and recoverability of the reported net monetary assets.
- Debt maturities, covenant headroom, ratings and liquidity beyond management’s stated coverage through 2015.
The financial statements received an unqualified audit opinion from Ernst & Young LLP. Management and the auditor reported effective internal control over financial reporting as of December 31, 2014.