CNH PROFIT DOUBLES IN THE SECOND QUARTER
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Lake Forest, Illinois (February 5, 2004) CNH Global N.V. (NYSE:CNH) today reported fourth quarter net income of $29 million compared to a fourth quarter 2002 net loss of $4 million, excluding restructuring charges in both periods. In the fourth quarter, the company took a $140 million restructuring charge, net of tax, related to the execution of its manufacturing rationalization plan. Including this restructuring charge, the company recorded a fourth quarter 2003 net loss of $111 million, compared to a net loss of $25 million, which included restructuring charges of $21 million, in the fourth quarter of 2002.
For the full year, CNH's net income of $30 million in 2003 compares favorably to a loss of $63 million in 2002, excluding restructuring charges in both years, and excluding the cumulative effect of a change in accounting principle in 2002 related to goodwill impairment. Improved performance in the company's Equipment Operations accounted for approximately $60 million of the improvement, with Financial Services contributing the balance. CNH's net loss was $157 million, or $1.19 per share, including restructuring charges of $187 million, compared to a 2002 net loss of $426 million, including restructuring charges of $38 million and a $325 million cumulative effect of a change in accounting principle.
"Last year was a pivotal time for CNH," Paolo Monferino, CNH president and chief executive officer said. "We achieved our primary objective to improve the bottom line by about $100 million before restructuring charges; our construction equipment business turned the corner; and our agricultural equipment business successfully completed the most aggressive new product launch program in our history. With the momentum we have generated through the second half of 2003, we fully expect to deliver a further improvement to the bottom line, excluding restructuring, for 2004."
Fourth quarter sales of agricultural equipment
Net sales of agricultural equipment increased to $1.885 billion for the quarter, compared to $1.646 billion in the fourth quarter of 2002. Net sales of agricultural equipment increased in the quarter reflecting currency variations and strong sales of the company's new line of combine harvesters across the three major markets of North America, Europe, and Latin America.
Fourth quarter 2003 North American industry unit sales of agricultural tractors improved across all segments, while industry sales of combines declined in the quarter. In Europe, industry sales of tractors and combines declined. Industry sales of tractors were down significantly in Latin America but combine sales rose significantly.
Total retail unit sales of CNH agricultural equipment increased in the quarter, with the company's Case IH and New Holland brands posting significant gains in combine sales for the three major markets. In the North American over-40 horsepower tractor segment, the company under-performed the market on an overall basis due to limited availability of certain new models.
Fourth quarter sales of construction equipment
Net sales of construction equipment were $798 million, up $33 million for the quarter, due to currency variations and gains in wholesales in North America, partly offset by declines in Europe. CNH under-produced construction equipment retail demand by 17%.
Industry sales of heavy equipment increased worldwide led by strong growth in Asia and North America. In Europe, industry sales of heavy equipment were down slightly, while in Latin America industry sales of heavy equipment were up slightly. Industry sales of light equipment were up significantly in North America and up slightly in Europe.
Retail unit sales of CNH construction equipment in North America increased in every category, led by sales of heavy equipment. Retail sales in Western Europe and Latin America declined.
Equipment Operations fourth quarter financial results
Fourth quarter net sales of equipment were $2.683 billion, compared to $2.411 billion for the same period in 2002. Net of currency variations, sales increased slightly compared to the same period last year.
CNH Equipment Operations' fourth quarter gross margin increased year-over-year by $27 million. The company's agricultural business benefited from improved volume and mix, the translation impact of euro-denominated margins, and material cost savings, partially offset by additional costs associated with the launch of new products, especially in Europe. On the construction equipment side, improved sales and pricing in North America, along with manufacturing efficiencies across the board, more than offset unfavorable volume and mix in other markets.
In the quarter, CNH Equipment Operations achieved an 8% year-over-year reduction in SG&A costs, primarily due to the success of the company's profit improvement initiatives. These savings, together with the positive contribution of the construction equipment business and the higher level of activity in the agricultural equipment business, were the primary factors driving the company's fourth quarter industrial operating margin of $103 million, compared to $59 million in the fourth quarter of 2002.
In total, medical and pension costs for active employees and retirees increased year-over-year by approximately $21 million in the quarter.
Equipment Operations full year financial results
In 2003, CNH's industrial operating margin rose to $381 million, compared to $262 million in 2002, an increase of 45%. Full year 2003 net sales of equipment increased to $10.069 billion, compared to $9.331 billion for the same period in 2002, mainly due to currency. CNH defines industrial operating margin as net sales, less cost of goods sold, SG&A, and Research and Development costs.
As a part of the Fiat (FIA.MI) relaunch plan, CNH's profit improvement initiatives produced savings totaling $147 million in 2003. In addition, new products contributed about $78 million in incremental profits for the year.
CNH Equipment Operations adjusted EBITDA was $501 million for 2003 compared to $420 million in the prior year. Interest coverage was 2.1 times for the full year 2003, compared to 1.4 times for the same period last year.
Financial Services fourth quarter financial results
In the fourth quarter of 2003, CNH Capital reported net income of $36 million, compared to $27 million in the same period last year. The improvement was due mainly to lower year-over-year bad debt expenses and improved net interest margins.
Financial Services full year financial results
CNH Capital's net income increased 55%, to $93 million in 2003, compared to a profit of $60 million in 2002. The significant growth in the bottom line performance of CNH Capital was due mainly to improved net interest margins during the year. The continued run-off of the high-risk, non-core portfolio, plus steady declines in past due and delinquency rates in CNH Capital's core business, resulted in lower bad debt expenses for the year. The total managed portfolio at the end of 2003 increased by 10% compared to the December 31, 2002 level. In December 2003, Standard & Poor's raised its ratings on eight subordinated tranches from seven previous CNH asset backed securitization transactions.
Equipment Operations net debt was $1.902 billion on December 31, 2003, compared with $3.524 billion on December 31, 2002. Translation of non-dollar-denominated debt, contributions to the US pension plan assets, cash restructuring costs, and the annual dividend to CNH shareholders reduced the benefit of the $2 billion debt for preferred stock exchange in April 2003 by about $420 million. Equipment Operations working capital, net of currency variations was approximately $32 million higher on December 31, 2003 than on December 31, 2002.
During 2003, Financial Services used cash generated through its operations to reduce its net debt to $3.150 billion on December 31, 2003 from $3.565 billion on December 31, 2002. As a result, CNH Capital reduced its intersegment debt to Equipment Operations from one-half down to about one-third of its total net debt.
Pension fund and obligation
Throughout 2003, and particularly in the fourth quarter, CNH's US and UK pension plan assets have benefited from returns in excess of CNH's assumptions and previously announced contributions. The favorable developments with plan assets essentially offset decreasing discount rates in 2003. As a result, the minimum pension liability was essentially unchanged in 2003.
Agricultural equipment market outlook for 2004
CNH expects North American industry sales of combines and over-40 horsepower tractors to show a 3 to 5 percent improvement from 2003 levels, with most of the increase in tractor sales likely in the first half of the year. In Europe, industry sales of tractors and combines are expected to decline by as much as 3 to 5 percent for the year. In Latin America, tractor sales may be off slightly, while combine sales are expected to decline moderately following an exceptionally strong performance in 2003.
Construction equipment market outlook for 2004
Industry sales of both heavy and light construction equipment are expected to increase slightly in North America in 2004. In Europe where there is no clear sign of recovery as yet, CNH believes that industry sales of both heavy and light construction equipment should be flat.
CNH outlook for 2004
In 2004, CNH expects the bottom line contribution from new products launched in 2002 and 2003 to grow, through both higher volumes and improved pricing realization. The new products launched in 2003 should position CNH to take full advantage of the expected growth in the markets. Continued progress on the company's profit improvement initiatives will also yield tangible results with most of the benefits in 2004 coming from CNH's global sourcing and footprint rationalization actions.
These gains will be partially offset by an increase in medical costs for active employees and retirees of about $30 million for the year. The company's profit performance may also be impacted should the dollar weaken further against the euro and the yen.
In 2004, CNH expects to incur restructuring charges of about $100 million, pretax, as the company should complete most of its restructuring initiatives. These initiatives, begun in 2000, have helped position CNH for continued bottom line growth in 2004.
Through a combination of margin improvement and top line growth, CNH expects to achieve a 2004 improvement in the bottom line comparable to that of 2003, excluding restructuring charges.
CNH management will hold a conference call later today to review its fourth quarter results. The conference call webcast will begin at approximately 10:00 am U.S. Eastern Time. This call can be accessed through the investor information section of the company's web site at www.cnh.com and is being carried by CCBN.
CNH is the power behind leading agricultural and construction equipment brands of the Case and New Holland brand families. Supported by more than 12,000 dealers in more than 160 countries, CNH brings together the knowledge and heritage of its brands with the strength and resources of its worldwide commercial, industrial, product support and finance organizations. More information about CNH and its products can be found on line at www.cnh.com.
Forward looking statements
This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this press release, including statements regarding our competitive strengths, business strategy, future financial position, budgets, projected costs and plans and objectives of management, are forward-looking statements. These statements may include terminology such as "may," "will," "expect," "should," "intend," "estimate," "anticipate," "believe," "continue," "on track," or similar terminology.
Our outlook is predominantly based on our interpretation of what we consider key economic assumptions and involves risks and uncertainties that could cause actual results to differ. Crop production and commodity prices are strongly affected by weather and can fluctuate significantly. Housing starts and other construction activity are sensitive to interest rates and government spending. Some of the other significant factors for us include general economic and capital market conditions, the cyclical nature of our business, customer buying patterns and preferences, foreign currency exchange rate movements, our hedging practices, our and our customers' access to credit, actions by rating agencies, political uncertainty and civil unrest or war in various areas of the world, pricing, product initiatives and other actions taken by competitors, disruptions in production capacity, excess inventory levels, the effect of changes in laws and regulations (including government subsidies and international trade regulations), technological difficulties, results of our research and development activities, changes in environmental laws, employee and labor relations, pension and health care costs, energy prices, real estate values, animal diseases, crop pests, harvest yields, government farm programs and consumer confidence, housing starts and construction activity, concerns related to modified organisms and fuel and fertilizer costs. Additionally, our achievement of the anticipated benefits of our profit improvement initiatives depends upon, among other things, industry volumes as well as our ability to effectively rationalize operations and to execute our multiple brand strategy. Further information concerning factors that could significantly affect expected results is included in our Form 20-F for the year ended December 31, 2002.
We can give no assurance that the expectations reflected in our forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in these forward-looking statements. All written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the factors we disclose that could cause our actual results to differ materially from our expectations. We undertake no obligation to update or revise publicly any forward-looking statements.