CNH Industrial N.V. — FY 2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016. Although the request identifies 2016 Q4, this filing is an annual report and does not provide a clear standalone fourth-quarter income statement or cash-flow summary. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Business context
CNH Industrial designs, manufactures, sells and finances agricultural and construction equipment, commercial vehicles, buses, specialty vehicles, engines, transmissions and axles. Its five segments are Agricultural Equipment, Construction Equipment, Commercial Vehicles, Powertrain and Financial Services. Operations span 45 countries, with commercial presence in approximately 180.
Key financial results
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $24.872 billion | $25.912 billion |
| Net sales | $23.669 billion | $24.677 billion |
| Net income (loss) | $(249) million | $248 million |
| Net income (loss) attributable to CNH Industrial | $(252) million | $253 million |
| Basic and diluted EPS | $(0.18) | $0.19 |
| Operating profit, Industrial Activities | $1.291 billion | $1.432 billion |
| Industrial Activities operating margin | 5.5% | 5.8% |
| Cash provided by operating activities | $2.108 billion | $2.786 billion |
| Cash used in investing activities | $921 million | $948 million |
| Cash and cash equivalents | $5.017 billion | $5.384 billion |
| Total equity | $4.451 billion | $4.843 billion |
Capital expenditures, excluding assets under operating leases and vehicles sold with buy-back commitments, were $503 million, down from $656 million. Cash and cash equivalents plus restricted cash totaled $5.854 billion. Available liquidity, including $2.890 billion of undrawn committed facilities, was $8.744 billion.
Consolidated gross debt was $25.276 billion, including $20.061 billion attributable to Financial Services. Consolidated net debt was $19.420 billion; Industrial Activities net debt was $1.561 billion and Financial Services net debt was $17.859 billion. The company reported $4.451 billion of equity. These measures should be read with the filing’s segment and non-GAAP definitions.
Segment performance and changes versus 2015
| Segment | 2016 revenue | 2016 operating profit | Notable comparison |
|---|---|---|---|
| Agricultural Equipment | $10.120 billion | $818 million | Revenue down 8.2%; profit down $134 million |
| Construction Equipment | $2.304 billion | $2 million | Revenue down 9.4%; profit down $88 million |
| Commercial Vehicles | $9.553 billion | $333 million | Revenue approximately flat; profit up $50 million |
| Powertrain | $3.707 billion | $232 million | Revenue up 4.1%; profit up $46 million |
Total revenue fell 4.0% (2.8% excluding currency effects). The largest pressure came from weaker agricultural and construction equipment sales, partly offset by stronger Powertrain sales and improved Commercial Vehicles profitability. Construction Equipment’s operating margin was only 0.1%; Agricultural Equipment’s was 8.1%, Commercial Vehicles’ 3.5% and Powertrain’s 6.3%.
Financial Services reported revenue of $1.570 billion and net income of $334 million, versus $1.603 billion and $368 million in 2015. Its managed portfolio, including unconsolidated joint ventures, was $24.8 billion, up $0.1 billion reported but down $0.1 billion excluding currency effects.
Cash flow, debt and liquidity
Operating cash flow decreased to $2.108 billion from $2.786 billion. Management reported $1.045 billion of net industrial cash flow, supported in part by working-capital improvement and inventory realignment. Liquidity declined by $457 million during the year, reflecting debt reduction, the European Commission fine payment, dividends and currency effects, partly offset by industrial cash generation and a smaller Financial Services lending portfolio.
CNH Industrial stated that cash, operating cash generation, financing sources and facilities were expected to fund working capital, capital expenditures and debt service at least through the end of 2017. The company’s ratings were below investment grade: S&P BB+ (stable outlook) and Moody’s Ba1 (stable outlook). Debt maturities and continued access to securitization and other funding markets remain important liquidity considerations.
Outlook, commentary, risks and unusual items
- Management planned approximately $100 million of additional restructuring expense in 2017, with expected incremental savings of about $60 million in 2017 and $80 million annualized thereafter.
- The Board recommended a 2016 dividend of €0.11 per common share, approximately €150 million, subject to shareholder approval at the April 2017 annual meeting. The filing does not provide clear full-year 2017 revenue or earnings guidance.
- A €495 million European Commission fine relating to the European truck antitrust investigation was paid in October 2016. The company recorded related non-tax-deductible charges totaling $551 million and disclosed early-stage follow-on private litigation in Israel and Ireland, with further claims possible.
- Other unusual 2016 items included a $34 million Venezuelan remeasurement and impairment charge, and a $59 million non-cash tax charge related to the reorganization of Latin American operations. Management reported a $249 million net loss for the year.
- At year-end, the funded deficit for pension, healthcare and other postemployment plans was $2.272 billion. The filing also identifies approximately $1.3 billion of potential joint liability with FCA for pre-2011 obligations; management considered FCA insolvency extremely remote and recorded no specific provision.
- Risks include cyclical demand and commodity prices, dealer and customer credit quality, foreign exchange and interest-rate movements, raw-material and supplier disruptions, emissions regulation, competition, emerging-market volatility, litigation, pension obligations, and funding access. Management said it did not believe Brexit would materially affect global operations, but acknowledged uncertainty.
- The company completed its acquisition of the Kongskilde agricultural grass and soil implement business on January 31, 2017, effective February 1, 2017.
Ernst & Young issued an unqualified audit opinion on the consolidated financial statements and on internal control over financial reporting. Management concluded disclosure controls and internal controls were effective as of December 31, 2016.
Important facts for investors to verify
- Review the full-year net loss bridge, especially the European Commission settlement, tax effects and other non-recurring charges; do not treat adjusted net income as U.S. GAAP earnings.
- Assess whether Industrial Activities can sustain cash generation as equipment markets and working capital change, and monitor 2017 restructuring costs against projected savings.
- Examine debt maturities, below-investment-grade ratings, committed facilities and Financial Services’ dependence on securitization and asset-backed funding.
- Track Construction Equipment profitability and goodwill impairment sensitivity, as well as credit losses, delinquencies and residual values in Financial Services.
- Monitor follow-on claims from the EU settlement, the FCA joint-liability exposure, pension funding needs and developments in Venezuela and other stressed markets.