Basis of analysis
The following table provides the consolidated statements of income and a breakdown of Group results between Industrial Activities and Financial Services. Industrial Activities represent the activities carried out by the four industrial segments Agricultural Equipment, Construction Equipment, Commercial Vehicles, and Powertrain, as well as Corporate functions.
The segmentation between Industrial Activities and Financial Services represents a sub-consolidation prepared on the basis of the core activities of each Group company.
Investments held by companies belonging to one segment in companies included in the other segment are accounted for under the equity method and are classified in the income statement under result from intersegment investments.
The parent company, CNH Industrial N.V., is included under Industrial Activities.
The sub-consolidation of Industrial Activities also includes companies that provide centralized treasury services (i.e., raising funding in the market and financing Group companies). The activities of the treasury companies do not include the offer of financing to third parties.
Results of Operations – 2014 compared to 2013
|Consolidated||Industrial Activities||Financial Services||Consolidated||Industrial Activities||Financial Services|
|Cost of sales||26,841||26,051||1,327||27,750||27,078||1,232|
|Selling, general and administrative costs||2,753||2,548||205||2,961||2,754||207|
|Research and development costs||878||878||-||797||797||-|
|Gains/(losses) on disposal of investments||-||-||-||(25)||(25)||-|
|Other unusual income/(expenses)||(40)||(40)||-||(77)||(36)||-41|
|Result from investments (*)||91||73||18||136||121||15|
|PROFIT/(LOSS) BEFORE TAXES||1,482||932||550||2,002||1,510||492|
|Result from intersegment investments||-||362||2||-||340||-1|
|PROFIT/(LOSS) ATTRIBUTABLE TO:|
|Owners of the parent||917||1,048|
(1) Amounts recast in order to reflect the change in presentation currency from euro to U.S. dollar. For additional information, refer to the section “Significant accounting policies”, paragraph “Change in presentation currency” in the Notes to the Consolidated Financial Statements.
(*) Includes income from investments as well as impairment (losses)/reversals on non-intersegment investments accounted for under the equity method.
The Group reported net revenues of $32,957 million for 2014, a 3.7% decrease compared to 2013 (down 2.0% on a constant currency basis).
Net revenues of Industrial Activities were $31,408 million in 2014, a 4.4% decrease compared to prior year (down 2.7% on a constant currency basis) with revenue growth for Construction Equipment and Powertrain more than offset by declines in Agricultural Equipment and Commercial Vehicles. Agricultural Equipment reported net revenues of $15,204 million for 2014, a 9.3% decrease from 2013 mainly due to lower volumes and unfavorable product mix primarily in LATAM and NAFTA. Net revenues for Construction Equipment were up 2.7% to $3,346 million, due to positive pricing in NAFTA and LATAM, along with positive volume and mix in NAFTA and EMEA. Commercial Vehicles revenues decreased 3.1% to $11,087 million, due to lower volumes and the negative impact of currency translation, partially offset by better pricing in all regions. Powertrain net revenues at $4,475 million, up 1.2% over 2013, were driven by higher volumes. Financial Services recorded net revenues of $2,086 million in 2014, an increase of 7.0% compared to 2013.
Cost of sales
Cost of sales were $26,841 million in 2014 (81.4% of net revenues), compared to $27,750 million in 2013 (81.1% of net revenues). Cost of sales of Industrial Activities were $26,051 million in 2014 (82.9% of net revenues), compared to $27,078 million in 2013 (82.5% of net revenues).
Selling, general and administrative costs
Selling, general and administrative (“SG&A”) costs amounted to $2,753 million in 2014 (8.4% of net revenues), with a decrease of 7.0% from the $2,961 million recorded in 2013 (8.7% of net revenues) mainly due to cost containment actions at Commercial Vehicles and Construction Equipment.
Research and development costs
In 2014, research and development costs of $878 million (compared to $797 million in 2013) comprise research and development costs not recognized as assets in the year, amounting to $446 million ($481 million in 2013), the depreciation of capitalized development cost of $12 million (zero million in 2013) and the amortization of previously capitalized development costs of $420 million ($316 million in 2013) with an increase attributable to all segments and mainly linked with the launches of new products. During 2014, the Group capitalized new expenditures for development in the amount of $676 million ($759 million in 2013).
2014 net other expenses were in line with the previous year amount.
Group trading profit was $2,399 million, or 7.3% of net revenues, in 2014. Trading profit decreased of $238 million compared to a trading profit of $2,637 million, or 7.7% of net revenues, in 2013. Trading profit of Industrial Activities was $1,867 million, a decrease of $252 million compared to prior year. Trading profit increases in Construction Equipment and Powertrain were more than offset by declines in Commercial Vehicles and Agricultural Equipment.
Construction Equipment benefitted from favorable volume and mix in all regions, positive price realization, and cost efficiencies. For Powertrain, the improvement was mainly due to the increase in sales, primarily with third parties, and continued industrial cost efficiencies partially offset by an increase in research and development costs. For Commercial Vehicles, positive performance in EMEA and APAC and significant reductions in SG&A costs were more than offset by the negative effects of challenging trading conditions in LATAM, due to a significant decline in market demand.
For Agricultural Equipment, lower volume and negative product mix were partially offset by positive net price realization, industrial efficiencies and structural cost reductions in SG&A costs. Trading profit for Financial Services totaled $532 million, an increase of $14 million compared with $518 million for 2013 with the positive impact of the higher average portfolio value partially offset by higher provisions for credit losses.
Gains/(losses) on the disposal of investments
Gains/(losses) on disposal of investments amount to zero in 2014. In 2013, this item amounted to $25 million and included an additional loss of $26 million on the sale of the investment in Kobelco Construction Machinery Co., Ltd., which took place in 2012, following an adverse ruling issued by the arbitrator on the price of the transaction.
In 2014, restructuring costs amounted to $192 million, as part of the Group’s Efficiency Program announced in July 2014. Agricultural Equipment recorded $46 million primarily for the planned closure of a 60% owned joint venture in China and cost reduction activities as a result of negative demand conditions. Construction Equipment recorded $43 million restructuring costs mainly due to the realignment of the dealer networks in EMEA as a result of the re-positioning of the Case and New Holland brand offerings, and the announced closure of an assembly plant in Calhoun, Georgia, USA. Commercial Vehicles recorded $103 million mainly due to actions to reduce SG&A costs and business support costs as a result of the transition to CNH Industrial’s regional structure, and costs related to the completion of manufacturing product specialization programs. For 2013, restructuring costs were $54 million, mainly related to Commercial Vehicles as a consequence of the actions initiated in 2012 to rationalize the heavy truck and firefighting businesses.
Other unusual income/(expenses)
Other unusual expenses were $40 million in 2014 mainly due to the closure of an indirect taxes claim, costs for the rationalization of strategic suppliers and other minor items. Other unusual expenses were $77 million in 2013, largely reflecting expenses related to the dissolution of the previous joint venture with Barclays group and its consolidation into Financial Services ($41 million) and costs for the rationalization of strategic suppliers.
The Group recorded an operating profit of $2,167 million (or 6.6% of net revenues) in 2014, a decrease of $314 million compared to $2,481 million (or 7.2% of net revenues) recorded for 2013. Operating profit for Industrial Activities was $1,635 million, down $369 million from 2013, with lower trading profit and higher restructuring costs partially offset by lower loss on disposal of investment. Operating profit for Financial Services totaled $532 million, up $55 million over 2013, which was affected by other unusual expenses reflecting costs ($41 million) related to the dissolution of the Financial Services joint venture with Barclays.
Following is a summary of the principal components of operating profit, by segment:
|Trading profit/(loss)||Gains/(losses) on disposal of investments||Restructuring costs||Other unusual income/(expenses)||Operating profit/(loss)|
|Eliminations and Other||(110)||(76)||-||-||-||-||(4)||(11)||(114)||(87)|
|Total of Industrial Activities||1,867||2,119||-||(25)||192||54||(40)||(36)||1,635||2,004|
|Total for the Group||2,399||2,637||-||(25)||192||54||(40)||(77)||2,167||2,481|
Net financial expenses were $776 million in 2014, compared to $615 million for 2013, and included a pre-tax charge of $71 million due to the re-measurement of Venezuelan assets denominated in bolivars. Based on changes to the way Venezuela’s exchange rate mechanism operates, CNH Industrial changed the bolivar fuerte (“Bs.F.”) rate used to re-measure its Venezuelan Commercial Vehicles operations financial statements in U.S. dollars. Excluding this exceptional charge, net financial expenses totaled $705 million, an increase of $90 million over the prior year, mainly deriving from higher average net industrial debt, partially offset by more favorable interest rates.
Result from investments was a net gain of $91 million in 2014 (compared to a net gain of $136 million in 2013). The decrease of $45 million is mainly due to lower earnings from the joint ventures in APAC as a result of more difficult trading condition.
Income taxes totaled $566 million in 2014 compared to $784 million in 2013, representing an effective tax rate of 38.2% for the year (2013 effective tax rate of 39.2%). The decrease of the effective tax rate in 2014 was primarily due to the net result of the exceptional pre-tax charge relating to the re-measurement of Venezuelan assets recognized in 2014, for which no corresponding tax benefit was recorded, that was more than offset by the favorable resolution of tax audits recorded in 2014.
Net profit was $916 million in 2014, compared to $1,218 million for 2013. Profit attributable to owners of the parent was $917 million, compared to $1,048 million for 2013.
The following is a discussion of net revenues and trading profit for each segment:
Revenues by segment:
|($ million)||2014||2013||% change|
|Eliminations and Other||(2,704)||(3,050)||-|
|Total of Industrial Activities||31,408||32,841||-4.4|
|Total for the Group||32,957||34,231||-3.7|
Trading profit/(loss) by segment:
|Eliminations and Other||(110)||(76)||(34)|
|Total of Industrial Activities||1,867||2,119||(252)|
|Total for the Group||2,399||2,637||(238)|
|Trading margin (%)||7.3||7.7|
Agricultural Equipment full-year net revenues were $15,204 million in 2014, a 9.3% decrease over 2013 (down 7.9% on a constant currency basis), driven by unfavorable volume and product mix, particularly in LATAM and NAFTA with a significant decrease for high horsepower products. This negative impact was partially offset by positive pricing.
The following table shows Agricultural Equipment revenues broken down by geographic region in 2014 compared to 2013:
|($ million)||2014||2013||% Change|
Worldwide agricultural equipment industry unit sales were down during 2014, with global demand for tractors and combines down 7% and 18% respectively. NAFTA tractor sales were up 3%, largely concentrated in the lower horsepower segment (under 140 hp). The over 140 hp segment and combine demand were both down 25% year over year. LATAM tractor and combine markets decreased 15% and 24% respectively. EMEA markets were down 8% for tractors and 10% for combines. APAC markets decreased 8% for tractors and 9% for combines.
Agricultural Equipment’s worldwide market share performance was flat for tractors and down for combines, mainly due to transition to Tier 4B engine compliant products in NAFTA and a negative market mix in APAC.
Agricultural Equipment trading profit totaled $1,689 million (trading margin of 11.1%), down $260 million compared to the $1,949 million trading profit for the 2013 (trading margin of 11.6%). Trading profit was down due to negative industrial cost absorption (due to decreased volumes) and unfavorable volume and mix (primarily tractors with horsepower over 140 hp and combines in NAFTA) that were only partially offset by net price realization as well as SG&A cost reductions.
Construction Equipment net revenues were $3,346 million, a 2.7% increase compared to 2013, (up 5.1% on a constant currency basis), due to positive pricing in NAFTA and LATAM, along with positive volume and mix in NAFTA and EMEA. This was partially offset by weakened activity in LATAM and APAC.
The following table shows Construction Equipment revenues broken down by geographic region in 2014 compared to 2013:
|($ million)||2014||2013||% Change|
In 2014, worldwide heavy and light construction equipment industry sales were down 9% and up 5%, respectively, compared to the prior year.
Industry heavy construction equipment sales were up in NAFTA and EMEA but decreased in LATAM and APAC. Industry light construction equipment sales were up in NAFTA and EMEA, flat in APAC and down considerably in LATAM.
Construction Equipment’s worldwide market share was flat overall, with increases in all regions for heavy equipment being offset by slight decreases in the light construction equipment markets in APAC and EMEA.
Construction Equipment trading profit totaled $66 million (trading margin of 2.0%), up $175 million over the $109 million trading loss for 2013, mainly due to favorable pricing in NAFTA and LATAM, positive volume and mix in all regions and continued containment actions in SG&A costs as a result of the realization of the Group’s brand re-alignment initiatives and global excavator strategy.
Commercial Vehicles reported full-year net revenues of $11,087 million, a decrease of 3.1% from 2013 (down 1.3% on a constant currency basis) due to lower volumes and the negative impact of currency translation, partially offset by better pricing in all regions. Net revenues increased in EMEA driven by higher volumes and favorable mix for trucks, despite lower deliveries in the bus business due to the transition to Euro VI applications. In LATAM, net revenues decreased significantly (-31.4%) as a result of overall weak market conditions, production curtailments to realign dealer inventories to market demand, and the negative impact of currency translation. In APAC, net revenues increased due to higher volumes, mainly for buses, partially offset by the negative impact of currency translation.
The following table shows Commercial Vehicles revenues broken down by geographic region in 2014 compared to 2013:
|($ million)||2014||2013||% Change|
During 2014, Commercial Vehicles delivered a total of 128,163 vehicles (including buses and specialty vehicles), representing a 5.5% decrease compared to 2013. Volumes were higher in the light vehicle segment (+2.1%), primarily as a result of the launch of the new Daily, while volumes declined in the heavy (-8.7%) and medium (-24.5%) segments driven by weak trading conditions in LATAM and Euro V pre-buy demand in the second half of 2013 in EMEA. Deliveries increased 3.9% in EMEA and 0.9% in APAC, but were down 37.5% in LATAM (with Brazil down approximately 33% and Argentina down approximately 39%).
The European truck market (GVW ≥3.5 tons) registered a 1.0% increase over 2013 to approximately 667,700 units. By category, light vehicles (GVW 3.5-6.0 tons) increased 8.4% while the medium vehicles market (GVW 6.1-15.9 tons) and heavy vehicles (GVW ≥16.0 tons) registrations were down 18.4% and 6%, respectively, mainly due to increased sales of Euro V vehicles in the second half of 2013 prior to the introduction of Euro VI emissions regulations in January 2014. The industry continued to experience large variations in demand across markets.
The Group’s market share in the European truck market (GVW ≥3.5 tons) remained unchanged year over year at an estimated 10.9%. In the light segment, the share is estimated to be 10.7% (down 0.6 p.p.). In the medium segment, the Group’s market share increased 4.5 p.p. to 29.1%, with gains in nearly all markets, and in the heavy segment was up 0.6 p.p. to 7.5%.
In LATAM, new truck registrations (GVW ≥3.5 tons), at 188,800 units, were down 16.4% compared to 2013. The largest decrease was registered in Venezuela, down 73.1%, while Argentina was down 26.0% and Brazil decreased 9.4%.
The Group’s share of the LATAM market (GVW ≥3.5 tons) was down 0.9 p.p. from 2013 to 10.1%, mainly driven by a 1.0 percentage point decrease in Brazil to 7.8%. Market share increased 0.8 p.p. and 0.4 p.p., respectively, in light and medium segments, while market share declined 1.9 p.p. in the heavy segment.
In APAC, registrations decreased by 2.6% compared to 2013, mainly due to the decline in demand in the Russian Federation (down 21.6%). Group market share was down 0.2 p.p. to 1.9%.
COMMERCIAL VEHICLES DELIVERIES
By geographic area
|(units in thousands)||2014||2013||% change|
|Germany & Switzerland||17.8||17.5||1.7|
|Iberia (Spain & Por tugal)||8.2||6.4||28.1|
|Rest of EMEA||32.2||30.1||6.9|
|SAIC Iveco Hongyan||25.0||28.0||-10.7|
|(units in thousands)||2014||2013||% change|
|Specialty vehicles (*)||3.9||4.2||-7.3|
(*) Defense and firefighting vehicles
Commercial Vehicles closed the year with a trading profit of $2 million, compared to trading profit of $145 million for 2013, as result of difficult trading conditions and negative foreign exchange currency impacts in LATAM, that were only partially offset by the recovery of trucks in EMEA and cost control actions within SG&A expenses.
Powertrain reported 2014 revenues of $4,475 million, an increase of 1.2% over the prior year (up 1.4% on a constant currency basis), primarily attributable to higher volumes of engines sold. For 2014, sales to external customers accounted for 41% of total net revenues up from 34% in 2013.
During the year, Powertrain sold a total of 583,589 engines, an increase of 7.1% year over year. By major customer, 24% of engines were supplied to Commercial Vehicles, 24% to Agricultural Equipment, 5% to Construction Equipment, and the remaining 47% to external customers. Additionally, Powertrain delivered 64,174 transmissions (+3.3% compared to 2013) and 156,921 axles, in line with the prior year.
Powertrain closed the year with a trading profit of $220 million, representing a trading margin of 4.9%, compared to $210 million (trading margin of 4.7%) for 2013. The improvement was due to an increase in volumes, a larger proportion of third-party business and industrial efficiencies, which was partially offset by an increase in research and development costs.
Financial Services reported net revenues of $2,086 million in 2014, up 7.0% compared to 2013, primarily due to the increase in the average value of the portfolio.
For 2014, Financial Services recorded a trading profit of $532 million, compared to $518 million in 2013. The improvement was mainly attributable to higher average portfolio value, partially offset by higher provisions for credit losses.