Business context and reporting period
CNH Industrial N.V.’s Form 20-F is an audited annual report for the fiscal year ended December 31, 2018, prepared under U.S. GAAP in U.S. dollars. It covers Agricultural Equipment, Construction Equipment, Commercial Vehicles, Powertrain and Financial Services. It is not a standalone fourth-quarter report; the filing does not provide a clear Q4-only set of financial results.
Comparative 2017 and 2016 figures were recast for the retrospective adoption of revenue-recognition, retirement-benefit and restricted-cash accounting standards. The independent auditor issued an unqualified opinion on the consolidated financial statements and internal controls.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $29.706 billion | $27.701 billion |
| Net sales | $27.831 billion | $25.769 billion |
| Net income | $1.099 billion | $290 million |
| Net income attributable to CNH Industrial | $1.068 billion; $0.79 basic EPS, $0.78 diluted | $272 million; $0.20 basic and diluted EPS |
| Adjusted EBIT (non-GAAP) | $2.101 billion; 7.1% of revenue | $1.640 billion; 5.9% of revenue |
| Adjusted EBITDA (non-GAAP) | $3.438 billion; 11.6% of revenue | $2.990 billion; 10.8% of revenue |
| Cash from operating activities | $2.554 billion | $2.865 billion |
| Cash used in investing activities | $1.920 billion | $1.869 billion |
| Cash used in financing activities | $723 million | $1.045 billion |
| Cash and cash equivalents | $5.031 billion | $5.430 billion |
| Restricted cash | $772 million | $770 million |
| Available liquidity, including undrawn committed facilities | $8.938 billion | $9.380 billion |
| Consolidated gross debt | $24.445 billion | $25.895 billion |
| Consolidated net debt (non-GAAP) | $18.650 billion | $19.702 billion |
| Net debt of Industrial Activities (non-GAAP) | $600 million | $908 million |
| Equity | $5.068 billion | $4.232 billion |
Debt includes $20.436 billion attributable to Financial Services; the company reports this business separately because its funding and cash flows differ from Industrial Activities. Industrial Activities generated $556 million of net industrial cash flow in 2018. Capital expenditures, excluding assets under operating leases and buy-back commitments, were $558 million, versus $492 million in 2017.
Material changes versus the prior comparable period
- Revenue rose 7.2% (6.7% at constant currency); Industrial Activities net sales rose 8.0% (7.3% constant currency).
- Adjusted EBIT increased $461 million, with reported margin up 1.2 percentage points. Industrial Activities Adjusted EBIT rose 39% to $1.585 billion, and its margin increased to 5.7% from 4.4%.
- Net income attributable to CNH Industrial increased to $1.068 billion from $272 million. The comparison reflects operating improvement and lower unusual charges, as well as tax effects; 2017 included a $128 million U.S. tax-law charge and a $92 million Venezuela deconsolidation charge.
- Operating cash flow declined $311 million to $2.554 billion. Management cited working-capital movements among the factors affecting cash generation.
- Gross debt declined $1.450 billion. Industrial Activities net debt fell by about $0.3 billion to $0.6 billion, while cash and cash equivalents decreased $399 million.
- Performance improved across the four industrial segments. Construction Equipment moved from a $16 million Adjusted EBIT loss to $91 million of Adjusted EBIT.
Segment performance and management commentary
| Segment | FY 2018 revenue | FY 2018 Adjusted EBIT | Change and reported drivers |
|---|---|---|---|
| Agricultural Equipment | $11.682 billion | $1.036 billion; 8.9% margin | Revenue up 9.4%; price realization and improved demand supported results. Management noted stabilization in many markets and early evidence of a North American row-crop replacement cycle. |
| Construction Equipment | $3.021 billion | $91 million; 3.0% margin | Revenue up 19.4%, driven by higher demand in all regions and favorable pricing; volume, mix and price gains improved profitability, partly offset by higher raw-material costs. |
| Commercial Vehicles | $10.939 billion | $299 million; 2.7% margin | Revenue up 3.6%, but deliveries fell 4.9% to 144,900 vehicles. Medium- and heavy-truck deliveries fell 20%; European market share decreased to 11.6%, and the European book-to-bill ratio was 0.98. |
| Powertrain | $4.565 billion | $406 million; 8.9% margin | Revenue up 4.5%; improved mix and manufacturing efficiencies were partly offset by higher product-development spending. |
| Financial Services | $1.989 billion | $516 million Adjusted EBIT | Revenue down 1.9%; net income was $385 million, down $67 million, principally reflecting a one-time $118 million tax benefit recorded in 2017. |
Outlook, risks, contingencies and unusual items
- Liquidity outlook: Management expected cash reserves, operating cash flow and available financing to fund working capital, capital expenditures and debt service at least through the end of 2019. The filing does not provide clear quantified 2019 revenue or earnings guidance in the supplied text. Management said the company met its 2018 guidance for Industrial Activities net sales, Adjusted diluted EPS and Net Industrial Debt.
- Strategy and leadership: The company announced a new organizational structure in January 2019 and said an updated strategic business plan was expected during 2019, addressing digitalization, electrification, automation, R&D and capital allocation, and operational footprint.
- Unusual benefit-plan item: Following a U.S. Supreme Court ruling, a healthcare-plan modification reduced the plan liability by $527 million. The benefit is being amortized over approximately 4.5 years; $80 million was recognized as a pre-tax gain in 2018.
- Restructuring and debt actions: Restructuring expense was $61 million, versus $93 million in 2017. The company recorded a $22 million charge related to repurchasing notes and repurchased approximately €268 million principal amount of notes due 2021.
- Tax and deferred tax assets: The effective tax rate was 28.4%, compared with 69.3% in 2017. CNH Industrial maintained a full valuation allowance against $0.7 billion of Italian deferred tax assets, citing softer European and Italian conditions and the pending strategic plan.
- Contingencies: Follow-on private litigation in several European jurisdictions and Israel followed the 2016 European Commission truck antitrust settlement; the claims remain at an early stage and outcomes cannot be predicted. The company reported $471 million of guarantees on third-party debt, commitments and affiliate performance. Environmental reserves were $38 million; the filing states management did not expect unresolved legal matters, in aggregate, to materially affect the consolidated financial statements.
- Principal risks: Cyclical demand and global economic conditions; agricultural commodity prices and weather; construction and infrastructure spending; trade restrictions and tariffs; raw-material and supplier constraints; emissions rules and compliance costs; foreign-exchange and interest-rate movements; customer and dealer credit quality and used-equipment residual values; refinancing and securitization access; pension obligations; cybersecurity and privacy; and labor disruptions.
- Other notable items: The company recorded a $450 million non-tax-deductible charge in 2016 and paid a €495 million European Commission fine that year. It deconsolidated its Venezuelan operations at year-end 2017; the 2017 charge was $92 million, and 2018 results from Venezuela were immaterial. The company suspended Iranian business activities in 2018 except for binding orders; disclosed sales to an entity indirectly owned or controlled by Iran’s government of approximately $4.6 million.
- Capital returns: The 2018 dividend paid was €0.14 per common share. The board proposed a €0.18 per-share dividend, approximately €244 million, subject to shareholder approval in April 2019. The company repurchased 12.5 million common shares for $156 million in 2018.
Most important facts for investors to verify
- Review the full-year results against the company’s separate quarterly releases; this 20-F does not clearly state standalone Q4 results.
- Reconcile non-GAAP Adjusted EBIT, Adjusted EBITDA and net-debt measures to U.S. GAAP, and assess whether the 2018 healthcare-plan gain affects comparability.
- Monitor Industrial Activities cash generation, working capital, capital spending and the distinction between Industrial Activities and Financial Services debt and liquidity.
- Track Commercial Vehicles’ order intake, deliveries and market share, particularly given the 0.98 European book-to-bill ratio and lower heavy-truck volumes.
- Assess Financial Services’ credit-loss allowances, delinquencies, residual values, securitization funding and refinancing needs.
- Follow realization of Italian deferred tax assets, the outcome of follow-on truck antitrust claims, and the final approval and payment of the proposed 2019 dividend.