CNH Industrial N.V. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited U.S. GAAP interim financial statements. Unless stated otherwise, amounts are in U.S. dollars. The company manufactures agricultural and construction equipment and provides customer and dealer financing.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $5.342 billion | $4.645 billion | +15.0%; +17.4% at constant currency |
| Net sales | $4.776 billion | $4.180 billion | +14.3%; +16.7% at constant currency |
| Net income | $486 million | $336 million | +44.6% |
| Net income attributable to CNH Industrial | $482 million | $333 million | +44.7% |
| Diluted EPS | $0.35 | $0.24 | Increased |
| Adjusted EBIT, Industrial Activities | $555 million | $429 million | +29.4% |
| Adjusted EBIT margin, Industrial Activities | 11.6% | 10.3% | +1.3 percentage points |
| Cash and restricted cash, March 31 | $4.005 billion | $4.061 billion at March 31, 2022 | Quarter-end cash decreased $1.124 billion from December 31, 2022 |
| Consolidated debt | $23.552 billion | $22.962 billion at December 31, 2022 | Increased |
Net sales growth reflected favorable price realization and higher sales volume. Industrial Activities cost of goods sold was 75.6% of net sales, compared with 78.6% in Q1 2022, as price realization more than offset continued cost increases. Research and development expense rose to $231 million from $184 million, primarily reflecting investment in products, technology, and digital growth. Interest expense increased to $272 million from $138 million; Industrial Activities’ net interest expense was $4 million versus $35 million.
Agriculture revenue was $3.927 billion, up 16.3%, and Adjusted EBIT was $570 million, up from $426 million; its margin rose to 14.5% from 12.6%. Construction revenue was $849 million, up 5.7%, and Adjusted EBIT was $44 million versus $32 million; its margin rose to 5.2% from 4.0%. Financial Services revenue was $549 million, up 17.8%, while net income declined to $78 million from $82 million.
Cash flow, debt, and liquidity
Operating cash flow was negative $701 million, compared with negative $887 million in Q1 2022. Management attributed the Q1 2023 use mainly to a $1.427 billion working-capital increase, including inventory and receivables. Investing cash flow was negative $749 million, including $90 million of property, plant and equipment and intangible-asset spending and $107 million for leased assets. Industrial Activities free cash flow was negative $673 million, compared with negative $1.059 billion, primarily due to seasonal working-capital needs.
Consolidated net debt, a company-defined non-GAAP measure, was $18.984 billion, versus $17.434 billion at year-end 2022. Excluding exchange-rate differences, the increase was $1.344 billion, principally reflecting negative Industrial Activities free cash flow and Financial Services portfolio growth. Industrial Activities’ net debt was $569 million, compared with net cash of $362 million at year-end. Financial Services debt mainly funds its receivables portfolio; consolidated financing receivables were $19.974 billion.
Available liquidity, as defined by the company, was $9.676 billion at March 31, including cash, restricted cash, undrawn unsecured committed facilities, other current financial assets, and net financial receivables from Iveco Group. Undrawn medium-term unsecured committed facilities were $5.073 billion. Management said cash, credit access, and expected operating cash flows should be adequate for known cash needs.
Material changes, outlook, and notable items
- Management cited favorable pricing, higher volumes, and improved gross margins as drivers of Industrial Activities’ results. It also noted continued inflation, supply-chain disruption, manufacturing inefficiencies, and pressure from higher interest rates, exchange-rate movements, and recession concerns.
- Financial Services earnings were pressured by North American margin compression, higher risk costs, and labor costs, partly offset by stronger volumes. Receivables more than 30 days past due were 1.4% of the portfolio, versus 1.3% a year earlier.
- CNH acquired the remaining 89.5% of Augmenta for approximately $79 million cash plus $10 million deferred consideration, and a 50.0085% controlling interest in Bennamann for approximately $51 million cash. Purchase-price valuations were preliminary; acquisition results were not material in the quarter.
- The company completed the sale of its Russia Financial Services business at a $6 million loss during Q1. It announced the divestiture of its Russian business activities for approximately $60 million and expected additional 2023 pre-tax charges of $10 million to $20 million. Russian operations’ revenue and earnings were described as not material.
- After quarter-end, CNH Industrial Capital LLC completed a $600 million notes offering due 2028 with a 4.55% coupon. On May 3, 2023, the company paid a dividend of €0.36 per share, totaling approximately $527 million.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. The company cautions that interim results may not indicate full-year results and identifies war in Ukraine, inflation, supply constraints, market demand, rates, currencies, and litigation among relevant uncertainties.
Risks, contingencies, and controls
The company reports legal and regulatory exposures involving product liability and performance, emissions, dealer and supplier disputes, intellectual property, competition, tax, and environmental matters. Management believes the reasonably possible losses on unresolved legal matters, beyond accrued amounts, would not materially affect the financial statements. Environmental reserves were approximately $27 million at March 31, 2023. The filing notes potential variability in outcomes and remediation costs. Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether seasonal working-capital absorption and negative Industrial Activities free cash flow moderate over the remainder of 2023.
- How rising costs, pricing, supply availability, and demand trends affect segment margins, especially in Agriculture and Construction.
- Financial Services portfolio credit quality, risk costs, funding needs, and refinancing requirements, including upcoming maturities.
- Final purchase accounting for Augmenta and Bennamann, and the expected costs and proceeds from the Russia divestiture.
- The assumptions behind management’s liquidity assessment and the use of non-GAAP measures such as Adjusted EBIT, net debt, and free cash flow.