OPERATING PERFORMANCE

RESULTS OF OPERATIONS – 2013 COMPARED TO 2012

(€ million)20132012(1)
Net revenues25,77825,785
Cost of sales20,89720,931
Selling, general and administrative costs2,2302,187
Research and development costs600560
Other income/(expenses)(66)(44)
TRADING PROFIT/(LOSS)1,9852,063
Gains/(losses) on disposal of investments(19)(38)
Restructuring costs40166
Other unusual income/(expenses)(58)(13)
OPERATING PROFIT/(LOSS)1,8681,846
Financial income/(expenses)(463)(467)
Result from investments10281
Share of profit/(loss) of investees accounted for using the equity method10186
Other income/(expenses) from investments1(5)
PROFIT/(LOSS) BEFORE TAXES1,5071,460
Income taxes590560
PROFIT/(LOSS) FROM CONTINUING OPERATIONS917900
Profit/(loss) from discontinued operations--
PROFIT/(LOSS)917900
PROFIT/(LOSS) ATTRIBUTABLE TO:  
Owners of the parent789791
Non-controlling interests128109

(1) For the year 2012, figures have been recast following the adoption of IAS 19 Revised. There was no significant impact for any individual line item.

Net revenues

The Group reported revenues of €25,778 million for 2013, in line with 2012 (on a constant currency basis revenues increased  4.3%).  Revenues  from  Agricultural  and  Construction  Equipment  were  in  line  with  the prior  year  at €16,006 million: the strong demand for Agricultural Equipment was offset by challenges faced by the Construction Equipment business and unfavorable impact of currency translation (on a constant currency basis, revenues increased +4.7%). Trucks and Commercial Vehicles revenues were €8,752 million, a decrease of 1.9% from 2012 (+1.5% on a constant currency basis), as a result of a recovery in demand in Europe, largely due to the Euro V pre-buy effect mainly in Q4 2013, and increased volumes in LATAM, offset by unfavorable impact of currency translation. Powertrain revenues at €3,331 million, up 13.6% over 2012 (up 14.6% on a constant currency basis), were driven by higher volumes for both internal and external customers.

Cost of sales

Cost of sales were €20,897 million in 2013 (81.1% of net revenues), substantially in line with €20,931 million in 2012 (81.2% of net revenues). Agricultural and Construction Equipment cost of sales decreased as a percentage  of revenues primarily due to manufacturing efficiencies from higher volumes in Agricultural Equipment, which resulted in an improvement in production cost absorption. Cost of sales increased for Trucks and Commercial Vehicles, mainly due to economics in Latin America and negative transaction exchange rate in Brazil, Russia and Turkey, and for Powertrain due to higher volumes.

Selling, general and administrative costs

Selling costs amounted to €1,033 million in 2013 (4.0% of net revenues), an increase of 3.1% over the €1,002 million recorded in 2012 (3.9% of net revenues), and comprise mainly marketing, advertising and sales personnel costs.

General and administrative costs amounted to €1,197 million in 2013 (4.6% of net revenues), a 1.0% increase compared with the €1,185 million  recorded in  2012 (4.6% of  net revenues)  and  comprise mainly expenses for administration which are not attributable to sales, production, and research and development functions.

Selling, general and administrative costs increased largely reflecting advertising and promotional activities implemented to support the growth in the Agricultural Equipment business, increased labor costs as well as additional bad debt provisions related to economic uncertainty in Southern Europe for Trucks and Commercial Vehicles, partially offset by the favorable impact of currency translation.

Research and development costs

In 2013, research and development costs of €600 million (€560 million in 2012) comprise research and development costs not capitalized, amounting to €362 million (€362 million in 2012), and the amortization of previously capitalized research and development costs of €238 million (€198 million in 2012). During 2013, the Group capitalized new expenditures for research and development in the amount of €572 million (€533 million in 2012). The increase is attributable to all Segments as a result of continued investment in new products and engine emissions compliance programs.

Other income/(expenses)

This item consists of miscellaneous operating costs which cannot be allocated to specific functional areas, such as indirect taxes and duties, and accruals for various provisions not attributable to other items of Cost of sales or Selling, general and administrative costs, net of income arising from trading operations which is not attributable to the sale of goods and services. Higher net other expenses in 2013 were principally due to lower gains on the disposal of fixed assets compared to 2012.

Trading profit/(loss)

Trading profit was €1,985 million, or 7.7% of net revenues, in 2013. Trading profit decreased €78 million compared to a trading profit of €2,063 million, or 8.0% of net revenues, in 2012, largely as a result of negative exchange rates. Higher volumes and positive mix in the Agricultural and Construction Equipment Segment and higher revenues and better capacity utilization for Powertrain were more than offset by Euro VI transitional costs, less favorable product mix and pricing environment in the Trucks and Commercial Vehicles Segment, as well as by unfavorable impact of currency translation.

Agricultural and Construction Equipment trading profit increased to €1,783 million for the year,  up  €229 million (+14.7%) from the prior year, with a trading margin of 11.1% (9.7% in 2012), reflecting positive pricing, mix and industrial productivity compared with 2012. Trucks and Commercial Vehicles closed the year with a trading profit of €101 million (1.2% of net revenues), compared with €466 million (5.2% of net revenues) for 2012. Negative market and product mix and tight price competition continued to affect margins primarily in Southern Europe. In LATAM, new product launch costs and unfavorable foreign exchange rate impacts more than offset positive market trends and pricing. Powertrain closed the year with a trading profit of €158 million, an increase of 12%, representing a trading margin of 4.7%, compared to €141 million (trading margin of 4.8%) for 2012. Higher revenues and better capacity utilization drove the improvement, which was partially offset by an increase in R&D costs.

Gains/(losses) on the disposal of investments

Net losses on the disposal of investments amounted to €38 million in 2012, mainly due to the sale of the 20% interest in Kobelco Construction Machinery Co. Ltd. In 2013, CNH Industrial recorded an additional loss of €19 million on the sale of that investment, following an adverse ruling issued by the arbitrator on the price of the transaction.

Restructuring costs

Restructuring costs were €40 million in 2013 compared to €166 million in 2012. For both periods, the costs were mainly related to the Trucks and Commercial Vehicles Segment as a consequence of the actions taken to rationalize the heavy truck and firefighting businesses in 2012.

The reorganization of Trucks and Commercial Vehicles’ manufacturing activities in Europe consisted of the concentration of heavy truck production at the plant in Madrid (which already produced heavy trucks) and termination of those activities in Ulm. At the same time certain other European firefighting vehicle plants were closed and the production transferred to Ulm.

Other unusual income/(expenses)

Other unusual expenses were €58 million in 2013, largely reflecting expenses related to the dissolution of the previous joint venture with Barclays group and its consolidation into the Group’s Financial Services business (€31 million) and costs for the rationalization of strategic suppliers. In 2012, there were unusual expenses of €13 million, which arose mainly from costs for the rationalization of strategic suppliers.

Operating profit/(loss)

The Group recorded an operating profit of €1,868 million (or 7.2% of net revenues) in 2013, a €22 million increase over the €1,846 million (or 7.2% of net revenues) recorded for 2012. The €78 million decrease in trading profit was more than offset by lower net unusual expense (€117 million compared to €217 million for 2012), as a result of reduced restructuring costs from the prior year.

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)
(€ million)2013201220132012201320122013201220132012
Agricultural and Construction Equipment1,7831,554(20)(38)(2)(1)(13)-1,7521,517
Trucks and Commercial          
Vehicles1014661-41167(45)(14)16285
Powertrain158141-1 -                 --157141
Eliminations and Other(57)(98)- --        ---1(57)(97)
Total for the Group1,9852,063(19) (38)     40166(58)(13 )1,8681,846

Non-operating items

Net financial expenses were €463 million in 2013, compared to €467 million for 2012. The reduction in net financial expense was primarily attributable to lower interest costs on employee benefits.

Result from investments was a net gain of €102 million in 2013 (compared to a net gain of €81 million in 2012), mainly due to higher earnings from the joint ventures in China.

Income taxes totaled €590 million in 2013 compared to €560 million in 2012. The effective tax rate increased from 38% to 39%, mainly due to one-time merger related impacts.

Profit/(loss) for the year

Net profit was €917 million in 2013, compared to €900 million for 2012. Profit attributable to owners of the parent was €789 million, compared to €791 million for 2012.

Business Segments

The following is a discussion of net revenues and trading profit for each segment.

Revenues by segment

(€ million)20132012% change
Agricultural and Construction Equipment16,00616,056-0.3
Trucks and Commercial Vehicles8,7528,924-1.9
Powertrain3,3312,93313.6
Eliminations and Other(2,311)(2,128)-
Total for the Group25,77825,7850.0

Trading profit/(loss) by segment

(€ million)20132012Change
Agricultural and Construction Equipment1,7831,554229
Trucks and Commercial Vehicles101466-365
Powertrain15814117
Eliminations and Other(57)(98)41
Total for the Group1,9852,063-78
Trading margin (%)7.78.0 

Agricultural and Construction Equipment

Net revenues

Agricultural and Construction Equipment reported revenues of €16,006 million for the year, in line with 2012 (up 4.7% on a constant currency basis): strong demand for Agricultural Equipment continued to offset a challenging business environment in the Construction Equipment business, as well as unfavorable impact of currency translation. The geographic distribution of industrial net revenues for the year was 43% NAFTA, 28% EMEA, 18% LATAM, and 11% APAC. For the year ended December 31, 2013 sales of agricultural equipment represented 79% of the Segment revenues, sales of construction equipment represented 15% and AG & CE Financial Services represented 6%.

The following tables show Agricultural Equipment revenues and Construction Equipment revenues broken down by geographical region in 2013 compared to 2012:

Agricultural Equipment revenues by geographical region:

(€ million)20132012% Change
NAFTA5,6185,4293.5
EMEA3,6813,726-1.2
LATAM1,9681,50730.6
APAC1,3561,526-11.1
Total12,62312,1883.6

Construction Equipment revenues by geographical region:

(€ million)20132012% Change
NAFTA9441,252-24.6
EMEA476550-13.5
LATAM743759-2.1
APAC291373-22.0
Total2,4542,934-16.4

Agricultural Equipment full-year net revenues were €12,623 million in 2013, a 3.6% increase over 2012 (up 9% on a constant currency basis) driven by positive net pricing, increased volumes and favorable product mix. Worldwide Agricultural Equipment market share performance was substantially flat for both tractors and combines.

Construction Equipment net revenues were €2,454 million, a 16.4% decrease compared to 2012 (down 11% on a constant currency basis), as continued weakness in most geographic regions was only partially offset by strength in LATAM. Worldwide Construction Equipment market share was substantially flat for both heavy and light equipment.

Trading profit/(loss)

Agricultural and  Construction Equipment  trading profit increased  to €1,783 million  for the year, up €229  million (+14.7%) from the prior year, with a trading margin of 11.1% (9.7% in 2012), reflecting positive pricing, mix and industrial productivity compared with 2012. Agricultural Equipment trading profit increased €214 million (+17.1%) over 2012 to €1,468 million and trading margin was 1.3 p.p. higher at 11.6%, as increased volumes, positive net pricing and reduced production costs more than offset increased R&D costs, primarily related to significant investments in new products and the launch of Tier 4B compliant products. Construction Equipment reported a trading loss of €83 million (€30 million loss for 2012) due mostly to lower volumes, partially offset by favorable pricing. Financial Services posted trading profit of €398 million, a €68 million increase over 2012, primarily reflecting the increase in the average portfolio and lower credit loss provisions.

Trucks and Commercial Vehicles

Net revenues

Trucks and Commercial Vehicles reported full-year revenues of €8,752 million, a decrease of 1.9% from 2012 (increase of 1.5% on a constant currency basis). A modest recovery in demand in Europe, mainly in Q4 2013, and a sustained increase in LATAM were more than offset by the negative market mix of products sold, reduced activity in the parts and services business, as well as unfavorable impact of currency translation.

During 2013, Trucks and Commercial Vehicles delivered a total of 135,681 vehicles (including buses and specialty vehicles), representing a 1% decrease from the prior year. The overall decrease was largely attributable to light vehicles, with deliveries down 7% for the year mainly to realign dealer inventory to retail demand. Volumes were up 16% for medium vehicles, 2% for heavy and 3% for buses. Deliveries were down 1% in EMEA and up 15% in LATAM. In the major European markets deliveries were up in Germany (+6%), France (+3%), Spain (+8%), Italy (+6%) and declined in UK (-6%).

The European truck market (GVW ≥3.5 tons) registered a 1.3% increase over 2012 to 659,400 units. Demand benefited from increased sales of Euro V vehicles in the heavy and medium categories (GVW >6.0 tons) during the second half of the year prior to the introduction of Euro VI emissions regulations in January 2014. By category, medium and heavy vehicle registrations were up 1.6% and 7.9%, respectively, for the full year, but down 2.6% for light vehicles (GVW 3.5-6.0 tons). The industry continued to experience large variations in demand across markets. The most significant growth was in the UK (+13.1%) and Poland (+13.3%). By contrast, there were continued contractions in Germany (-1.8%), France (-4.2%) and Italy (-13.1%).

Group share of the European truck market (GVW≥3.5 tons) remained stable year-over-year at an estimated 11.0% (11.1% in 2012), although with a less favorable product and market mix. Market share gains were achieved in Italy (+1.1 p.p. to 34.2%), Spain (+1.4 p.p. to 21.3%), France (+0.2 p.p. to 13.5%), Germany (+0.3 p.p. to 8.3%) and Poland (+1.1 p.p. to 11.7%), while a weak performance was realized in UK (-0.3 p.p. to 6.1%). In the light vehicle category, Group share was 11.4% for the year (-0.1 p.p. over 2012), with gains in all major markets except UK: positive results were registered in Italy (+1.2 p.p. to 29.8%), Spain (+ 1.1 p.p. to 19.1%), France (+0.4 p.p. to 15.6%) and Germany (+0.8 p.p. to 8.2%). In the medium category, share was 0.6 percentage points higher at 24.6%, with gains in nearly all markets; the most significant increases were in Italy (+5.3 p.p. to 72.6%), Spain (+5.2 p.p. to 49.2%) and UK (+2.9 p.p. to 21.2%). The Group retained its solid second place position in the European medium vehicle market. For heavy vehicles, share was in line with the prior year at 7.1%. The Group maintained its leadership position in Italy (35.5%) and posted a significant gain in Spain (+1.6 p.p. to 19.5%).

The European bus market (GVW >3.5 tons) increased by 4.5% over 2012 to 34,100 units. Demand benefited from a significant increase of Euro V sales prior to the introduction of Euro VI emissions regulations, leading to a recovery of the market in the second half of the year, after a contraction in the first half. Increases were registered in Eastern Europe (+30.0%), France (+14.8%), Germany (+12.9%) and Italy (+11.8%), while a decline was recorded in Scandinavia (-15.4%), Benelux (-7.7%) and UK (-3.7%). All categories other than Coach registered growth: Citybus (+7.1%), Intercity (+5.2%), Minibus (+8.3%), with Coach (-6.7%).

The Group estimated share in the European bus market increased 2.0 percentage points over 2012 to 18.5% The market share registered a positive trend in almost all areas: Italy (+5.2 p.p.), Scandinavia (+3.8 p.p.), Spain (+3.5 p.p.) and Germany (+3.3 pp.) where Iveco Bus was the third player. Iveco Bus and Heuliez Bus confirmed their leading position in France with a market share at 41.7%. The market share increase was driven by Citybus (+4 p.p.), mainly in Italy and Germany (thanks to major deliveries of Crossway Low Entry). Positive performances were registered also for Intercity (+1.3 p.p. to 36.5%) and Minibus (+1.0 p.p. to 15.6%).

In LATAM, truck registrations (GVW ≥3.5 tons) were up 8.9% over the prior year to 225,800 units, with increases of 12.1% in Brazil due to the recovery after the Euro V introduction in 2012, and 16.6% in Argentina, offset by a significant decline in Venezuela (-24.9%).

Group share in LATAM was 11.0%, a decline of 0.6 percentage points over 2012, despite a 1.5 percentage point increase in Argentina to 23.8%. The share was 8.8% in Brazil (-0.7 p.p.) and 7.4% in Venezuela (-4.1 p.p.). Declines were recorded in the light category (-1.5 p.p. to 16.4%) and in heavy (-1.0 p.p. to 10.5%), while the medium category gained 1 p.p. to 7.4%.

In China, Naveco – the 50/50 joint venture with Nanjing Automotive Corporation (controlled by the SAIC Group) – sold 42,000 light vehicles in the Power Daily range (up 5% over 2012) and 84,869 medium vehicles in the Yuejin range (up 14% over 2012). SAIC Iveco Hongyan Commercial Vehicles Co. Ltd. (33.5% owned by Trucks and Commercial Vehicles), sold 28,008 heavy commercial vehicles, representing a 65% increase over the previous year.

Trucks and Commercial Vehicles Sales

By country

(units in thousands)20132012% change
France18.317.83
Germany15.014.16
UK6.67.0-6
Italy14.813.96
Spain5.85.48
Rest of EMEA33.236.3-8
EMEA93.794.5-1
LATAM30.126.115
APAC11.916.4-27
Total Sales135.7137.0-1
Naveco126.9114.811
SAIC Iveco Hongyan28.017.065
Grand Total290.6268.88

By product

(units in thousands)20132012(**)% change
Heavy33.733.32
Medium20.417.616
Light68.073.3-7
Buses9.49.13
Specialty vehicles (*)4.23.713
Total Sales135.7137.0-1
(*) Defense and firefighting vehicles.
(**) For the purpose of comparability with 2013, data for 2012 has been reclassified. Changes include recognition of truckderived buses, which were still recognized under “light” in 2012, under “buses”.

Trading profit/(loss)

Trucks and Commercial Vehicles closed the year with a trading profit of €101 million, compared with €466 million for 2012. Negative market and product mix and tight price competition continued to affect margins primarily in Southern Europe. In LATAM, new product launch costs and unfavorable foreign exchange rate impacts more than offset positive market trends and pricing.

Powertrain

Net revenues

Powertrain reported 2013 revenues of €3,331 million, an increase of 13.6% over the prior year (up 14.6% on a constant currency basis) with higher volumes recorded to both Group companies and external customers. For 2013, sales to external customers accounted for 34% of total revenues, in line with 2012.

During the year, Powertrain sold a total of 544,812 engines, an increase of 14.3% year-over-year. By major customer, 30% of engines were supplied to Trucks and Commercial Vehicles, 30% to Agricultural and Construction Equipment, and the remaining 40% to external customers. Additionally, Powertrain delivered 62,133 transmissions (-3.2% over 2012) and 156,772 axles (+1.2% over 2012).

Trading profit/(loss)

Powertrain closed the year with a trading profit of €158 million, an increase of 12%, representing a trading margin of 4.7%, compared to €141 million (trading margin of 4.8%) for 2012. Higher revenues and better capacity utilization drove the improvement, which was partially offset by an increase in R&D costs aimed at maintaining technological leadership.

Results for 2013 by Activity

The following tables provide a breakdown of the consolidated statements of income, financial position and cash flows between “Industrial Activities” and “Financial Services”. Financial Services includes subsidiaries of Agricultural and Construction Equipment and Trucks and Commercial Vehicles engaged in retail and dealer finance, leasing and rental activities.

Basis of analysis

The segmentation between Industrial Activities and Financial Services represents a sub-consolidation prepared on the basis of the core business activities carried out by each Group company.

Investments held by companies belonging to one segment in companies included in the other segment are accounted for using the equity method. To provide a more meaningful presentation of net profit, the results of investments accounted for in this manner 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 perform centralized treasury activities (i.e., raising funding in the market and financing Group companies). These activities do not, however, include the offer of financing to third parties.

Operating Performance by Activity

 20132012
(€ million)ConsolidatedIndustrial ActivitiesFinancial ServicesConsolidatedIndustrial ActivitiesFinancial Services
Net revenues25,77824,7311,46825,78524,6821,508
Cost of sales20,89720,39192720,93120,2871,049
Selling, general and administrative costs2,2302,0741562,1872,020167
Research and development costs600600-560560-
Other income/(expenses)(66)(71)5(44)(45)1
TRADING PROFIT/(LOSS)1,9851,5953902,0631,770293
Gains/(losses) on disposal of investments(19)(19)-(38)(38)-
Restructuring costs4040-166166-
Other unusual income/(expenses)(58)(27)(31)(13)(13)-
OPERATING PROFIT/(LOSS)1,8681,5093591,8461,553293
Financial income/(expenses)(463)(463)-(467)(467)-
Result from investments (*)1029111817110
PROFIT/(LOSS) BEFORE TAXES1,5071,1373701,4601,157303
Income taxes590476114560434126
PROFIT/(LOSS)917661256900723177
Result from intersegment investments 256(1) 177 -
PROFIT/(LOSS)917917255900900177

(*)   Includes income from investments as well as impairment (losses)/reversals on non-intersegment investments accounted for under the equity method

Industrial Activities

For 2013, net revenues for Industrial Activities were in line with the prior year at €24,731 million. For Agricultural and Construction Equipment, revenues were substantially unchanged from 2012 (+3% in US dollar terms) as revenue growth for the Agricultural Equipment business, driven by strong demand, continued to offset lower revenues for Construction Equipment attributable to challenging market conditions. Trucks and Commercial Vehicles reported a 1.3% decrease. A modest recovery in demand in Europe and a sustained increase in LATAM were more than offset by the negative market mix, as well as reduced activity for parts and services and negative exchange rate impacts. Powertrain revenues were up 13.6% for the year, driven by higher volumes to both Group companies and external customers.

Trading profit for Industrial Activities totaled €1,595 million, compared with €1,770 million in 2012. The €175 million decrease was attributable to the lower result for Trucks and Commercial Vehicles – which reflected negative market and product mix, pricing pressures in Europe, new product launch costs and negative exchange rate impacts – as well as reduced volumes for Construction Equipment. Those adverse factors were partially offset by an improved result for the Agricultural Equipment business, driven primarily by increased volumes and positive net price realization, in addition to the positive impact of higher volumes for Powertrain.

Operating profit for Industrial Activities was €1,509 million, down €44 million over 2012, with the decrease in trading profit being partially offset by a €131 million reduction in net unusual expense (mainly lower restructuring costs for Trucks and Commercial Vehicles).

Financial Services

For Financial Services, net revenues were down 2.7% from the prior year to €1,468 million.

(€ million)20132012% change
Agricultural and Construction Equipment1,1781,197-1.6
Trucks and Commercial Vehicles290311-6.8
Total1,4681,508-2.7

For Agricultural and Construction Equipment, Financial Services reported revenues of €1,178 million, a decrease of 1.6% from 2012 (+1.8% in US dollar terms). The impact of the increase in the average portfolio, driven by sales growth for Industrial Activities, was offset by a reduction in interest charged to customers, in line with the general reduction in market rates.

For Trucks and Commercial Vehicles, Financial Services totaled revenues of €290 million, a 6.8% decrease from the prior year reflecting a contraction in the managed portfolio for Western European markets and lower interest rates.

Trading profit was €390 million, up €97 million over €293 million in 2012.

(€ million)20132012Change
Agricultural and Construction Equipment39833068
Trucks and Commercial Vehicles(8)(37)29
Total39029397

For Agricultural and Construction Equipment, Financial Services posted a trading profit of €398 million, a €68 million year-over-year increase (€330 million in 2012) attributable to the higher average value of the portfolio, in addition to decreases in SG&A expenses and lower bad debt provisions.

For Trucks and Commercial Vehicles, Financial Services reported a trading loss of €8 million, compared with a loss of €37 million for 2012. The improved result reflects a lower provisioning requirement for the managed portfolio for Central and Eastern Europe.