CNH REPORTS IMPROVED THIRD QUARTER NET INCOME
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- September Year-To-Date Net Income up 58% to $156 Million
- Equipment Operations Profitability Improvement Continues
- Equipment Markets Remained Generally Strong
- CNH Capital Continues Strong Performance
- Reorganization By Global Brands to Accelerate Growth
Lake Forest, Illinois (October 25, 2005) CNH Global N.V. (NYSE:CNH) today reported third quarter 2005 net income of $27 million, compared to third quarter 2004 net income of $25 million. Results include restructuring charges, net of tax, of $16 million in the third quarter of 2005, and $9 million during the same period last year. Third quarter diluted earnings per share of $.12, were up $.01 compared with the third quarter of 2004. Before restructuring charges, net of tax, third quarter 2005 diluted earnings per share were $.19, compared with $.15, for the third quarter of 2004.
During the third quarter Harold Boyanovsky was confirmed as the company's President and Chief Executive Officer, a position he had held on an interim basis since February. Subsequently, the company announced its reorganization to global brand businesses, in order to invigorate its Case IH and New Holland agricultural brands and its Case and New Holland construction equipment brands, whose heritages and loyal dealer networks are its most powerful assets.
"For the past several years and again this quarter we have steadily improved our financial results" said Boyanovsky. "We must strengthen our position and accelerate growth in sales, margins and earnings. Driven by customer expectations for quality, service and responsiveness, global brand businesses are key for our transformation. We expect the achievement of our growth plans will follow."
Other highlights from the quarter included the following:
- Compared with last year's third quarter, increased pricing offset higher material costs and other cost increases, particularly in North America and Western Europe. Steel costs, especially for construction equipment, increased more than anticipated, and are currently not moderating as expected.
- Component shortages have improved since the second quarter but shipment delays continued for some products.
- During the third quarter, the company launched several new models of agricultural tractors and hay & forage equipment, including its first products powered by Tier 3-compliant engines. Tier 3 product launches will continue through 2006. Construction equipment launches of Tier 3-compliant products will begin in the fourth quarter.
- In North America, during the quarter, the Case IH ASM planter and the New Holland Speedrower ? self propelled windrower both received "AE50" awards recognizing these products as among the top 50 innovative new products introduced in 2004, from the American Society of Agricultural and Biological Engineers.
- During the third quarter, CNH Capital completed its second retail asset backed securitization ("ABS") transaction of the year in the U.S. totaling $1.15 billion.
Net sales of equipment, comprising the company's agricultural and construction equipment businesses, were $2.8 billion for the third quarter, essentially the same as in the third quarter of 2004.
- Agricultural equipment net sales were $1.8 billion for the third quarter, down 5% from the prior year, and down 7%, excluding currency variations.
- Excluding currency variations, our sales in North America were up 5%. Sales in Europe were down 8%. The sharp industry decline in Latin America continued in the third quarter, driving down our sales in the region by approximately 62%.
- Third quarter 2005 production of tractors and combines was approximately 12% lower than retail unit sales in the third quarter, approximately the same level of underproduction as in the third quarter of 2004.
Construction Equipment Net Sales
- Net sales of construction equipment increased by 9% to $950 million for the third quarter, compared to $871 million in the third quarter of 2004, and were up 7% excluding currency variations.
- Excluding currency variations, North American sales were up 12%. However, increased sales of backhoe loaders and heavy equipment in North America were offset by a decrease in sales for the same products in Europe, where sales decreased by 10%. Sales in Latin America and Rest-of-World markets were up 27% and 31% respectively.
- Production of CNH's major construction equipment products was higher than retail unit sales by approximately 5%, slightly less than the overproduction in the third quarter of 2004.
Equipment Operations gross margin (net sales of equipment less cost of goods sold) for agricultural and construction equipment represented as a percent of net sales, improved by 1.5 percentage points to 15.7% of net sales, or $434 million, in the third quarter of 2005, compared to 14.2% of net sales, or $396 million, in the third quarter of last year.
- Agricultural equipment gross margin improved strongly compared to the prior year's third quarter as net price realization and manufacturing efficiencies more than offset a continued decline in volumes of higher-margin combines in Latin America and Rest-of-World markets.
- Construction equipment gross margin improved compared to the prior year's third quarter due to net price realization and manufacturing efficiencies.
Equipment Operations industrial operating margin (defined as net sales, less cost of goods sold, SG&A and R&D costs) expressed as a percent of net sales improved by 1.3 percentage points to 4.7% of net sales, or $131 million in the third quarter of 2005, compared to 3.4% of net sales, or $94 million, in the same period of 2004. The improvement in gross margin dollars, noted above, accounted for the increase. Increased R&D expenditures, primarily for new products, were offset by lower SG&A costs, due to lower than previously anticipated incentive compensation.
Adjusted EBITDA for Equipment Operations increased by 19% to $160 million for the quarter, or 5.8% of net sales, compared to $135 million in the third quarter of 2004, or 4.8% of net sales. Our interest coverage ratio for the three months ended on September 30, 2005 was 3.2 times, compared to 2.7 times for the three months ended September 30, 2004.
Financial Services operations third quarter 2005 net income increased by 8% to $52 million, compared to $48 million net income earned in the third quarter of last year. This increase reflects continued improvements in the Financial Services receivables portfolio quality.
CNH's net income for the first nine months of 2005 improved by 58% to $156 million, compared to $99 million for the first nine months of 2004. Results include restructuring charges, net of tax, of $24 million in the first nine months of 2005 compared to $46 million in the same period of 2004. Diluted earnings per share were $.67, compared to $.42 in 2004. Before restructuring, year-to-date diluted earnings per share increased by 24% to $.77 compared with $.62 for the same period last year.
Net sales of equipment, comprising the company's agricultural and construction equipment businesses were $9.0 billion for the first nine months of 2005, compared to $8.7 billion for the same period in 2004. Net of currency variations, net sales were at approximately the same level as in the prior year.
Adjusted EBITDA for Equipment Operations increased by 8% to $564 million for 2005, or 6.3% of net sales, compared to $522 million in 2004, or 6.0% of net sales. Our interest coverage ratio for the nine months ended on September 30, 2005 was 3.5 times, compared to 3.0 times for the nine months ended September 30, 2004.
Financial Services operations net income improved by 39% to $145 million for the first nine months of 2005, compared to $104 million for the same period last year. This improvement reflects ABS transactions, improved yields on our wholesale portfolio, higher retail and wholesale ABS volumes, as well as ongoing improvements in receivables portfolio quality.
Equipment Operations net debt (defined as total debt less cash and cash equivalents, deposits in Fiat affiliates cash management pools and inter-segment receivables) was $839 million on September 30, 2005, compared to $824 million on June 30, 2005 and $1.3 billion on September 30, 2004. In the quarter, $59 million of net cash was generated by operating activities. Positive net income plus depreciation and amortization and a decrease in working capital (defined as accounts and notes receivable, excluding inter-segment notes receivable, plus inventories less accounts payable) net of currency variations of approximately $135 million, all contributed to cash generation from operating activities in the quarter. The company's $120 million contribution to its U.S. defined benefit pension plan during the quarter was a partial offset.
At incurred currency rates, working capital on September 30, 2005 was $2.3 billion, compared to $2.7 billion on September 30, 2004.
In the quarter, CNH became an eligible borrower under Fiat S.p.A.'s 1 billion Euro credit facility agreement. Under the new facility, CNH was allocated exclusive rights to 300 million Euros of the syndicated credit line, plus the opportunity to access the remainder of any unutilized capacity. In addition, Fiat has renewed its $1 billion credit line revolver with CNH through January 31, 2007. As of September 30, 2005, CNH had approximately $3.9 billion available under $6.3 billion total lines of credit and asset-backed facilities.
During the quarter, the company modified its cash management operations, to pool the North American cash balances of Equipment Operations and Financial Services rather than to have each separately pooling with the Fiat cash management system. The result of this action is a decline in debt with Fiat Affiliates at Financial Services, a decline in deposits in Fiat Affiliates cash management pools by Equipment Operations and an increase in inter-segment funding. These actions, amongst others, are reflected in the $836 million reduction in Financial Services debt with Fiat Affiliates in the quarter, to a debt balance of $285 million on September 30, 2005. In the same period, Equipment Operations reduced its deposits in Fiat Affiliates cash management pools by $839 million to $580 million. This reduction in deposits also funded repayment of $218 million of Case Corporation bonds that matured in August and a $170 million increase in cash and cash equivalents deposited with third parties.
Financial Services net debt decreased approximately $238 million to $3.8 billion on September 30, 2005 from $4.0 billion on June 30, 2005, primarily reflecting the completion of its $1.15 billion U.S. retail ABS transaction during the third quarter 2005.
CNH continues to believe that for the full year 2005, industry retail unit sales of agricultural equipment will be at about the same level as last year, although with regional differences not previously anticipated. CNH expects worldwide tractor industry unit retail sales will be up slightly with industry sales of combines down about 19%. Industry sales of under 40 horsepower tractors in North America are now anticipated to be lower than previously forecast, but industry sales of over 40 horsepower tractors are expected to be better than last year by 5%-10%. In Western Europe, industry unit sales of tractors could be down about 6% although combine sales should be up about 6%. In Latin America, CNH continues to expect that full-year tractor industry volumes will be about 25% below last year and sales of combines will be down 60%-65%. Industry sales in Rest-of-World markets now should be up strongly for tractors and up slightly for combines.