CNH Global N.V. (CNH) recently reported a net income (excluding restructuring and exceptional items) of $323 million in the third quarter of 2012, surging 18.8% year over year but declined 9.3% sequentially.
Diluted EPS was $1.34 in the quarter versus $1.14 in the prior year quarter and $1.47 in the previous quarter. The results beat the Zacks Consensus Estimate of $1.16.
The rise in net income was led by the company’s impressive performances in the agricultural, financial and industrial services businesses neutralizing the negative effects of the currency translation and high research and development expenses during the quarter.
Revenues
Net sales in the third quarter amounted to $4.83 billion, proliferating 4.8% year over year but down 3.8% sequentially. The rise in the sales was driven by the mounting demand for the company’s Agricultural Equipment business and increased agricultural product prices, neutralizing the adverse impact of drought in North America. The decline in the construction equipment sales owing to the weak market condition and foreign currency translation was mitigated by the rise in sales of the agricultural equipment. The results surpassed the Zacks Consensus Estimate of $4.56 billion.
Segment-wise, Agricultural Equipment sales amounted to $4.0 billion, increasing 12.3% annually but remaining flat sequentially. The rise in the sales was on the back of the company’s impressive pricing structure, positive product mix and higher volume. The segment witnessed accelerated revenue growth in all of its regions (based on constant currency).
Construction Equipment sales came to $830 million with a 20.7% yearly and 17.1% sequential decline. The reduction in sales was attributable primarily to the weak industrial condition in Latin America as well as in the APAC region.
Margins
Agriculture Equipment’s gross margin in the third quarter of 2012 was 22.0% versus 21.8% in the third quarter of 2011 and 22.7% in the previous quarter. Gross margin for the Construction Equipment segment decreased to 12.9% from 16.0% in the previous year period and 13.8% in the last quarter.
Operating margin for Agricultural Equipment came to 12.0% compared with 11.5% in the previous year quarter and 12.6% in the last quarter. This was a result of product and pricing mix benefits.
The decline in the volumes of the commercial products, currency translation and industrial capacity absorption proved detrimental to the Construction Equipment margin during the quarter, due to which operating margin dropped to (1.8)% from 4.7% in the previous year period and 1.7% in the last quarter.
Effective tax rate for the third quarter of 2012 were lower than management’s previously provided forecast of 32% – 35% for full year 2012, coming in at 31%.
Selling, general and administrative expense was $427 million compared with $470 million in the year-earlier quarter, and research, development and engineering expense was $160 million compared with $131 million in the prior-year quarter.
Balance Sheet and Cash Flows
Exiting the third quarter of 2012, the cash and cash equivalents came in at $998 million down from $1.1 billion at the end of June 2012. Long-term debt was $12.6 billion at the end of September 30, 2012 compared to $13.9 billion at the end of the previous quarter.
Year to date, net cash used by operating activities was $321 million versus $66 million generated in the previous year period. Capital expenditures incurred were $334 million, increasing 53.2% from the prior year period.
Outlook
Management maintained its guidance for full year of 2012. Industry’s Agricultural and Construction Equipment unit volumes are expected to be flat to down 5% while the company’s revenues are expected to grow more than 5% with operating margins above 8.6% in 2012.
Based in Amsterdam, CNH Global N.V. engaged in manufacturing agricultural and construction equipment products. The company’s primary competitors include big players such as Caterpillar Inc. (CAT), Deere & Company (DE) and Komatsu Ltd. (KMTUY).
Our Take
The company currently retains a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating. We also maintain a long-term ‘Underperform’ recommendation on the stock.
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