CNH REPORTS FIRST QUARTER RESULTS
Revenues for the first quarter were $2.6 billion, comparable with the same period last year, on a pro forma basis. Unfavorable foreign exchange rates negatively impacted first quarter sales by $85 million, compared to 1999.
"Our operating performance exceeded expectations for the quarter despite the impact of higher interest rates and unfavorable foreign exchange," said Jean-Pierre Rosso, chairman and chief executive officer. "Our integration process is proceeding ahead of plan, and we now expect to realize increased synergies this year.
"During the quarter, we increased market share in almost every major market around the world, demonstrating our customers continuing loyalty to their preferred product brands," Rosso added. "Our commercial organizations and dealer networks remain extremely focused on serving their customers and meeting their needs."
First quarter results reflect significant cost reductions achieved through merger integration activities and ongoing cost initiatives. These include lower research and development expenditures and lower selling, general and administrative costs, as compared to the prior year on a pro forma basis. In addition, improved price realization and somewhat higher production volume were also positive factors in the quarter. These were offset by the impact of higher interest rates for both the equipment and financial services businesses, and a $23 million, or $.10 per share, negative impact of foreign exchange, attributed primarily to the Euro.
Rising interest rates and unfavorable foreign exchange are expected to reduce earnings in 2000 from the company's prior expectations. However, increased production and greater merger synergy savings are anticipated to result in stronger overall operating performance for the year, as compared to 1999, on a pro forma basis. In the second quarter of 2000, when the impact of these negative factors will be more pronounced, earnings are expected to be comparable to the second quarter of 1999, on a pro forma basis. For the full year, The company now expects $150 million in synergy savings and at least $500 million by 2003.
Merger Integration Ahead of Plan
Merger integration activities were ahead of plan during the first quarter. A voluntary separation program was instituted in the period, and consolidation of the company's administrative and corporate functions continued. As a result, the company has reduced its global headcount by 1,700 since September 1999, before the effect of acquisitions and other factors.
CNH has been actively pursuing the divestiture of products and operations that were agreed to with U.S. and European regulatory agencies as conditions of the merger. This week, the company announced that it reached an agreement for the sale of its interest in Hay and Forage Industries (HFI) to AGCO Corporation, subject to approval of the U.S. Department of Justice. Under the agreement, AGCO will continue to provide Case IH-branded hay and forage products to the Case distribution network until March 31, 2001, and will supply parts for those products under a long-term agreement.
In addition, CNH reached an agreement with the A.R.G.O. Group for the sale of the New Holland facility in Breganze, Italy. CNH also reached an agreement with A.R.G.O. for the sale of its large square baler line that is currently produced at its Case facility in Neustadt, Germany. Both agreements are pending approval of the European Commission.
In February, CNH completed the divestiture of the Austrian commercial distribution rights of two of its compact tractor models to Lindner Traktorenwerk GesmbH, an Austrian agricultural machinery maker. CNH will continue to produce the tractors at its Case Steyr plant in St. Valentin, Austria, and supply those tractors to Lindner. The agreement was approved by the European Commission and has already been implemented.
Negotiations for the previously announced divestiture of other products and operations in North America and Europe are continuing.
CNH Considers Equity Financing Options
The original equity financing plan for the business merger of New Holland and Case contemplated raising $2 billion of new equity. In anticipation of this event, a subsidiary of Fiat contributed $1.4 billion in advance of raising the capital. This advance would be converted into shares of CNH common stock as part of a $2 billion public equity offering, the timing of which is dependent upon market conditions. In the event that the equity offering does not occur by June 30, 2000, the advance to capital is designed to convert into shares of CNH common stock on that date at a price determined by averaging the daily closing prices (after excluding the highest and lowest prices) of CNH stock for the preceding 20 trading days. Given current market conditions, CNH management is continuing to evaluate the various equity financing options that are available to the company.
Worldwide Retail Equipment Sales
First quarter retail unit sales of CNH construction equipment were up worldwide with increases in all geographic markets compared to the combined operations of the first quarter of 1999. In Latin America, retail sales were up slightly on the strength of compact equipment sales. In North America and Europe, the company reported double-digit retail sales growth. CNH outperformed the industry in each of its major regions around the world.
Retail unit sales of CNH agricultural equipment were lower in the first quarter than from combined operations in the comparable period last year. Growth in unit sales of tractors under 40 horsepower was more than offset by declines in larger tractors and combines. However, the decline in CNH agricultural equipment sales was less than that of the industry, and the company increased its market share in nearly every major market around the world.
CNH Capital, the financial services unit of CNH Global, reported net income of $14 million for the first quarter of 2000, compared to $30 million in the same period last year, on a pro forma basis. The year-over-year decrease in net income is attributable to lower margins on receivables and lower gains on asset-backed securitizations resulting from a rising interest rate environment, as well as increased loss provisions.
CNH Capital's managed portfolio increased to $10.9 billion, up more than 10 percent as compared to the prior year, on a combined basis. While the company's geographic expansion and diversification initiatives contributed to the portfolio growth, sustained weakness in the farm economy continues to put pressure on the large agricultural equipment segment of the business.
To support its growing portfolio, CNH Capital issued a $1.1 billion asset-backed securitization in the first quarter, the largest such transaction in the company's history and the first to include both Case and New Holland equipment receivables. CNH Capital continues to execute its growth strategy. It will establish a pan-European bank with headquarters in Ireland during the third quarter of 2000, pending regulatory approval. Plans include incorporating the financing operations in the company's major markets throughout Western Europe by 2002.
Substantial progress was made during the quarter toward integrating the financial services business. The closing of six finance offices in North America, Australia and Latin America was initiated in the quarter and most back-room processes will be integrated in all regions by year end.
"We're pleased with the progress we've made toward integrating our two financial services businesses," stated Ted R. French, chairman, CNH Capital. "Our decision to establish a banking operation in Europe demonstrates our commitment to Case and New Holland customers in the region. The bank will serve as a platform for further geographic and product expansion across the European community. We continue to grow and diversify our business in all regions of the world, and to leverage our strength as one of the world's largest equipment finance businesses."
In financial services, the current pressure for higher interest rates is expected to continue during 2000. Over time, the company can incorporate rate changes into its pricing, but until they stabilize, higher interest rates are expected to negatively impact earnings.
The outlook remains unchanged for CNH's agricultural equipment and construction equipment markets; however, rising interest rates and unfavorable foreign exchange are adversely impacting the company's equipment and financial services operations.
Industry demand for agricultural equipment remains in line with the company's expectations, driven by low commodity prices and higher grain inventories. As a result, the company continues to expect worldwide sales of agricultural equipment to be moderately lower than the previous year, particularly high horsepower tractors and combines.
The global outlook for CNH's construction equipment markets continues to be stable. In North America, demand in 2000 is expected to be only slightly lower than strong 1999 levels, as construction activity continues to be sustained by a healthy economy. In Europe, the sales outlook remains slightly above last year due to stronger market conditions. In Latin America and other markets around the world, the company continues to expect significant sales improvement compared to relatively low 1999 levels as a result of more stable economic conditions.
With strong global brands, CNH is a leader in the agricultural equipment, construction equipment and financial services industries and had combined 1999 revenues of approximately $11 billion. CNH sells its products in 160 markets through a network of more than 10,000 dealers and distributors. CNH products are sold under the following brands: Case, Case IH, Fermec, Fiatallis, Fiat-Hitachi, Link-Belt (earth moving equipment), New Holland, O&K and Steyr.
Forward Looking Statements
The information included in this news release contains forward-looking statements and involves risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. The company's outlook is predominantly based on its interpretation of what it considers key economic assumptions. 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 the company include general economic and capital market conditions, the cyclical nature of its business, foreign currency movements, the company's and its customers' access to credit, political uncertainty and civil unrest 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 regulation (including government subsidies and international trade regulations), the effect of conversion to the Euro, technological difficulties, changes in environmental laws, and employee and labor relations. Additionally, CNH's achievement of the anticipated benefits of the merger of New Holland and Case, including the realization of expected annual operating synergies, depends upon, among other things, its ability to integrate effectively the operations and employees of New Holland and Case, and to execute its multi-branding strategy. Further information concerning factors that could significantly impact expected results is included in the following sections of the company's Form 20-F for 1999, as filed with the Securities and Exchange Commission: Business ? Business Strategy, Employees, Environmental Matters, Seasonality and Production Schedules, and Competition; Legal Proceedings; and Management's Discussion and Analysis of Financial Condition and Results of Operations.
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