CNH REPORTS THIRD QUARTER RESULTS
CNH reported a third quarter loss before restructuring charges of $58 million, compared to a third quarter 2001 loss, before restructuring and goodwill amortization, of $81 million. The loss per share was $.10 for the third quarter of 2002, including restructuring costs of $.01 per share.
For the first nine months of 2002, consolidated revenues were $7.354 billion compared to $7.302 billion in 2001. Acquisitions contributed approximately $225 million in the first nine months of 2002; the year-to-date impact of foreign exchange rates was negligible. The company's net loss before restructuring for the first nine months of 2002 was $59 million, compared to a net loss of $93 million, before restructuring and goodwill amortization, for the same period in 2001.
"The extended decline in the construction equipment industry has not slowed our efforts to strengthen our balance sheet or invest for the future. " Paolo Monferino, CNH president and chief executive officer, said. "Through concerted efforts to reduce working capital, our Equipment Operations generated $223 million net cash from operations during the last quarter. Since the merger, our profit improvement initiatives have contributed over $500 million to our operating results, putting us well on the way to achieving our $850 million profit improvement target by 2005."
"In spite of the market conditions we have not stopped building for the future. Our new acquisitions, the Kobelco operations in North America and Europe and Shanghai Tractor in China, are profitable and showing real growth in their respective markets. The new products we launched in North America and Europe have been well received and should become increasingly important to our operating income in the months ahead."
Sales of agricultural equipment.
Revenues from sales of agricultural equipment totaled $1.429 billion, up 4% compared to $1.374 billion in the third quarter of 2001. Excluding the impact of acquisitions and favorable exchange rates, revenues were unchanged from 2001 levels.
Worldwide, third quarter industry sales of agricultural equipment were up from 2001 levels across all major markets with the biggest percentage increases in Brazil and in the developing markets. However, in North America, industry sales in the combine and high horsepower tractor segments declined.
Worldwide retail sales of CNH agricultural equipment increased significantly in the quarter, with the greatest gains coming from Brazil and Asia. In Western Europe, sales of combines were up substantially, while sales of tractors declined slightly due to limited availability of the new models introduced at the end of the second quarter. In North America, combine sales declined with the industry and high horsepower tractor sales were impacted by the company's actions to limit its exposure to the risks inherent in the operating lease business. During the quarter, CNH under-produced retail demand by 5%.
Sales of construction equipment.
During the third quarter, construction equipment revenues totaled $670 million, up 5% compared to $637 million last year. Excluding acquisitions and the impact of favorable exchange rates, revenues declined by 10%. Third quarter industry sales of both heavy and light equipment were down significantly in North America and Western Europe and up in Latin America and Asia. Unit sales of CNH heavy equipment followed the industry pattern in the Americas and Asia, but increased in Europe. Retail sales of CNH light equipment were up in Europe and Asia, but were down in the Americas. During the quarter, CNH reduced both company and dealer inventories, under-producing retail demand by 5% overall.
Equipment Operations Third Quarter Results .
Third quarter net sales of equipment increased to $2.099 billion, compared to $2.011 billion for the same period in 2001.
During the third quarter, employee medical and pension costs increased by $22 million, negatively impacting the company's gross margin, SG&A expenses and R&D costs for active employees and other operating expenses for inactive employees. For the first nine months of 2002, employee medical and pension costs have increased by $47 million compared to 2001.
Despite this, CNH's Equipment Operations gross margin for the quarter was essentially unchanged from the same period in 2001. Acquisitions, improved margins on new products, manufacturing efficiencies and material cost reductions offset costs associated with new product launches and the adverse impact of volume and mix changes.
Compared to the third quarter of 2001, SG&A increased in the quarter due mainly to acquisitions and unfavorable exchange rates. Interest expense for the quarter was down significantly, reflecting the impact of the company's debt reduction actions completed in the prior period.
Year-to-date, net sales from Equipment Operations were $6.920 billion, compared to $6.794 billion for the first nine months of 2001.
CNH's profit improvement initiatives totaled $35 million in the third quarter, bringing the total for the year to $83 million. Since the merger, the company has achieved a total of $516 million in profit improvements.
Financial Services Third Quarter Results .
In the third quarter of 2002, CNH Capital reported net income of $12 million, compared to a net loss of $2 million in the same period last year. Lower loan loss provisions, lower interest expense, and an Asset-Backed Securitization (ABS) transaction in Australia accounted for most of the bottom line improvement. During the quarter, past due and delinquency rates in the core business continued to decline. For the first nine months of 2002, Financial Services earned a profit of $33 million compared with a profit of $11 million for the same period in 2001.
Balance Sheet and Cash Flow .
The decrease in Equipment Operations net debt of $167 million since June 30, 2002 was due mainly to reductions in inventory and receivables in the quarter. The $192 million reduction in Financial Services net debt was due primarily to a successful ABS transaction in Australia and the sale of certain retail receivables in Europe to BNP Paribas Leasing Group, the company's joint venture partner.
During the quarter, Equipment Operations generated $223 million net cash from operating activities mainly through reductions in working capital.
Market Outlook for Agricultural Equipment .
Based on the results of the first nine months, CNH believes that 2002 total industry sales of agricultural equipment will be up slightly compared to 2001 levels. In Europe, where CNH is the market leader, industry sales are now expected to end the year up 4% compared to last year. In North America, industry unit sales of under 40 horsepower tractors have been much stronger than anticipated while sales of combines and high horsepower tractors have steadily weakened. Both trends are expected to continue through the balance of the year. Full year sales in Latin America, mainly Brazil, may end the year well above 2001 levels.
Market Outlook for Construction Equipment .
Worldwide industry sales of heavy equipment are expected to decline for the full year, as stronger sales in Asia and Latin America are unlikely to fully compensate for the significant declines in North America and in Europe. Worldwide sales of light equipment show the same pattern, although the drop in North America is greater for light equipment. CNH believes that 2002 industry sales in the company's two most important markets, North America and Europe, will finish the year down by about 12% compared to last year.
CNH Outlook for 2002 .
Recent new product introductions in the agricultural equipment business should contribute to share gains and gross margin improvements in the fourth quarter, benefiting the company's bottom line. In Financial Services, the steady improvement in the core business demonstrated throughout the first nine months is expected to continue, generating incremental profit for the company. In addition, the successful completion of the company's debt reduction actions during the second quarter should reduce fourth quarter interest expense by about $20 million compared to the same period last year.
Again in the fourth quarter, the company intends to continue to hold wholesale levels below retail sales levels and production below wholesale levels in order to reduce dealer and company inventory, which may impact the gross margin. The company's bottom line will be negatively impacted by employee benefit and pension costs which are expected to increase by about $15 million compared to the fourth quarter of 2001.
For the fourth quarter, CNH expects to be near breakeven before restructuring charges. The uncertainties of the current political environment, and the potential impact of those uncertainties on the construction equipment marketplace, add a significant degree of risk to this outlook.
By the end of 2002, CNH expects to reduce its Equipment Operations net debt by over $1.8 billion compared to the beginning of the year, despite funding of transactions related to the Kobelco alliance for approximately $230 million. Through the company's successful equity offering and the debt-to-equity swap with majority shareholder Fiat in the second quarter, net debt was reduced by about $1.5 billion. In the second half of the year, reductions in Equipment Operations' working capital should permit a reduction in net debt of approximately $300 million. The additional resources needed to reduce the industrial debt should be provided by dividends from Financial Services which is expected to generate a profit for the year. In addition, Financial Services is reducing substantially its funding needs through the sale of its European portfolio to the company's joint venture partner, BNP Paribas Leasing Group, and the run-off of the non-core business portfolio.
As described in the company's 20-F and F-3 filings, preliminary results of transitional impairment tests of goodwill (under US GAAP) have indicated that the company may incur a goodwill impairment charge associated with its construction equipment business in excess of $300 million in 2002, reflecting the negative trends in the construction equipment industry.
Due to the continued poor performance of the equity markets, the value of CNH pension fund assets has declined during 2002. At quarter-end asset values, CNH would be required to increase the additional minimum liability by approximately $450 million at year end, resulting in a decrease in shareholders' equity of about $275 million net of tax.