CNH Industrial(CNHI) - 2024 Q4 - Annual Report

PART I Business CNH Industrial is a global equipment company with agriculture, construction, and financial services segments, facing a significant 2024 downturn Consolidated Results - 2024 vs 2023 | (in millions of dollars except per share amounts) | 2024 | 2023 | Change | |---|---|---|---| | Consolidated Revenues | $19,836 | $24,687 | (20)% | | of which Net Sales of Industrial Activities | $17,060 | $22,080 | (23)% | | Net income | $1,259 | $2,287 | (45)% | | Diluted Earnings per share | $0.99 | $1.69 | $(0.70) | - The 23% decrease in net sales and 45% drop in net income for fiscal year 2024 were primarily driven by decreased industry demand and lower sales volumes[32] - CNH operates through three business segments: Agriculture, Construction, and Financial Services. The Agriculture and Construction segments are collectively referred to as "Industrial Activities"[17] - The company has strengthened its core technologies through strategic acquisitions, including Raven Industries in 2021 (precision agriculture), Hemisphere GNSS in 2023 (GNSS solutions), and Augmenta in 2023 (machine vision)[21] Business Overview - CNH is a global equipment company that designs, produces, and sells agricultural and construction equipment, supported by a Financial Services segment offering retail and wholesale financing[16] - Effective January 1, 2025, CNH is considered a U.S. domestic issuer and is no longer eligible for foreign private issuer exemptions, requiring compliance with U.S. proxy rules, Regulation FD, and Section 16 reporting[14] Business Segments - The Agriculture segment offers a full line of equipment including tractors and combines under brands like Case IH and New Holland, with a focus on precision agriculture solutions[19][20][24] - The Construction segment provides a full line of heavy and light construction equipment, including excavators and loaders, under the CASE and New Holland Construction brands. The company began producing full-electric compact construction equipment in 2023[22][23][29] - The Financial Services segment, commercially known as CNH Capital, provides financing to end-use customers and wholesale financing to dealers for CNH's equipment[30] Industry Overview - The agriculture machinery industry's sales are primarily influenced by net farm income, government subsidies, weather conditions, and commodity prices[33] - The construction equipment market is divided into heavy equipment, driven by infrastructure projects and government spending, and light equipment, influenced by residential and commercial construction levels[40][45][47] - CNH is developing methane-powered tractors and has invested in Bennamann Ltd, a company that captures fugitive methane emissions from farm waste to produce biomethane, supporting farm energy independence[37] Competition - CNH competes in a highly competitive industry based on product performance, innovation, quality, distribution, customer service, and price[53] - Key competitors in the agricultural equipment market include Deere & Company, AGCO Corporation, and Kubota Tractor Corporation[55] - Principal competitors in the construction equipment market include Caterpillar Inc., Komatsu Ltd., and Volvo Group[56] Sales, Distribution, Parts and Services - The company primarily sells and distributes its products through a large network of independent dealers, with over 2,500 dealer owners for Agriculture and approximately 427 for Construction[57] - CNH operates and administers 30 parts depots worldwide to support its Agriculture and Construction segments, ensuring timely availability of parts, which is a key competitive factor[65] Human Capital - As of December 31, 2024, CNH had 35,850 employees, with 10,342 in the U.S. and Canada. A portion of its U.S. manufacturing workforce is covered by collective bargaining agreements[89] - The company has a Code of Conduct and a Policy on Diversity and Inclusion, rejecting all forms of discrimination and promoting equal opportunities[91][93] - CNH focuses on employee health and safety with a goal of zero accidents, extending ISO 45001 certification, and implementing awareness initiatives[94] Risk Factors CNH faces strategic, operational, compliance, and financial risks, including a material weakness in inventory controls, impacting its global business Strategic Risks - The company's performance is highly dependent on the cyclical agricultural industry, which is influenced by farm income, commodity prices, and government policies. Unfavorable market conditions in 2024 led to lower sales and are expected to persist into 2025[115] - Operating a global business exposes CNH to political, economic, and trade risks, including changes in laws, tariffs, labor disruptions, and geopolitical conflicts like the wars in Ukraine and the Middle East[116][120] - Success depends on innovation and market acceptance of new products, particularly in precision technology, automation, and electrification. Failure to deliver competitive solutions could result in reduced revenue and market share[126][127] Operational Risks - CNH relies on many suppliers for raw materials and components, with some parts sourced from a single supplier. Supply chain disruptions, such as those caused by geopolitical events, can lead to manufacturing delays and increased costs[141][142] - The company faces significant cybersecurity risks, including threats to its IT systems, networks, and the sensitive data it stores. A security breach could disrupt operations, compromise confidential information, and harm its reputation[149][150] - Laws and collective labor agreements in many countries could impair flexibility in restructuring business activities and may lead to work interruptions if negotiations are unsuccessful[154] Compliance Risks - The company is subject to increasingly stringent and evolving laws regarding product emissions, fuel efficiency, and safety, which require significant R&D and capital expenditures to ensure compliance[156][157] - Proposed "right to repair" legislation could require CNH to provide access to software code, potentially creating product safety issues, compromising engine controls, and harming intellectual property protection[158] - A material weakness in internal control over financial reporting was identified relating to deficiencies in controls around the existence and completeness of raw material and work-in-process inventory[164] Financial and Taxation Risks - As of December 31, 2024, CNH had significant outstanding consolidated gross indebtedness of $26.9 billion, which could limit financial flexibility and the ability to obtain additional funding[177] - The company is exposed to market risks from fluctuations in currency exchange rates and interest rates, which can impact earnings, equity, and the cost of financing for both Industrial Activities and Financial Services[167][170] - CNH is a tax resident of the U.K., but tax authorities in other jurisdictions (e.g., the Netherlands or Italy) could challenge this status, potentially leading to adverse tax consequences such as withholding taxes or additional corporate income tax[180][181] Risks Related to Our Common Shares - The company's loyalty voting program, which grants long-term shareholders special voting shares, may reduce the liquidity of common shares and could hinder attempts to change management or acquire control of the company[185][186] - As of January 31, 2025, EXOR N.V. held a voting interest of approximately 45.3% in CNH, giving it significant influence over the company[186] Unresolved Staff Comments None Cybersecurity CNH manages cybersecurity risks via its IT Security and Compliance organization, employing various defenses and incident response plans - The company's Cybersecurity Program is overseen by the Audit Committee and managed by the CIO and CISO, focusing on strategy, policy, and processes for enterprise network security[189] - CNH's cybersecurity strategy includes risk assessments, threat analysis, security tools, employee training exercises (phishing simulations), and monitoring of security standards for external suppliers[189][190] Properties CNH operates 40 global manufacturing facilities, along with other properties, deemed sufficient for current and future production needs - As of December 31, 2024, CNH operates 40 manufacturing facilities worldwide, which it considers adequate to meet its production requirements[194] Legal Proceedings CNH is involved in various legal proceedings, but management expects no material financial impact beyond current accruals - The company is exposed to numerous legal risks incidental to its business, including litigation and regulatory investigations[198] - Management does not expect the outcome of unresolved legal matters to have a material effect on the company's financial statements, beyond what has already been accrued[200] Mine Safety Disclosures Not applicable PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CNH's NYSE-listed common stock is subject to a dividend policy and a $500 million buyback program, with tax implications for shareholders Issuer Purchases of Equity Securities (Fourth Quarter 2024) | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | Approximate USD Value of Shares that May Yet Be Purchased ($) | |---|---|---|---| | 10/1/2024 - 10/31/2024 | 692,299 | 11.01 | 354,699,515 | | 11/1/2024 - 11/30/2024 | 475,815 | 10.52 | 349,694,750 | | 12/1/2024 - 12/31/2024 | — | — | 349,694,750 | | Total | 1,168,114 | | 349,694,750 | - The company's dividend policy targets an annual payout of 25-35% of its consolidated net income[209] - A $500 million share buyback program was authorized by the Board of Directors in February 2024, effective March 1, 2024[211] Management's Discussion and Analysis of Financial Condition and Results of Operations CNH's 2024 revenues and Industrial Activities' EBIT declined significantly due to lower demand and destocking, leading to negative free cash flow Operating Results Consolidated Results of Operations (2024 vs 2023) | (in millions of dollars) | 2024 | 2023 | |---|---|---| | Total Revenues | $19,836 | $24,687 | | Net sales | $17,060 | $22,080 | | Total Costs and Expenses | $18,379 | $21,984 | | Cost of goods sold | $13,350 | $16,838 | | SG&A expenses | $1,712 | $1,863 | | R&D expenses | $924 | $1,041 | | Net income attributable to CNH | $1,246 | $2,275 | Adjusted EBIT by Segment (2024 vs 2023) | (in millions of dollars) | 2024 | 2023 | $ Change | 2024 Adj EBIT Margin | 2023 Adj EBIT Margin | |---|---|---|---|---|---| | Agriculture | $1,470 | $2,636 | $(1,166) | 10.5% | 14.5% | | Construction | $169 | $238 | $(69) | 5.5% | 6.1% | | Adjusted EBIT of Industrial Activities | $1,404 | $2,634 | $(1,230) | 8.2% | 11.9% | - Agriculture net sales fell 22.8% to $14.0 billion in 2024, driven by lower shipment volumes due to decreased industry demand and dealer inventory adjustments across all regions[345] - Construction net sales declined 22.4% to $3.1 billion in 2024, also due to lower shipment volumes from reduced market demand and dealer destocking[348] - Financial Services net income increased by $8 million to $379 million in 2024, driven by favorable volumes and margins, partially offset by increased risk costs and higher delinquencies, particularly in South America[352] Liquidity and Capital Resources Net Cash (Debt) Reconciliation (as of Dec 31) | (in millions of dollars) | 2024 | 2023 | |---|---|---| | Total Debt | $(26,944) | $(27,472) | | Less: Cash and cash equivalents | $3,191 | $4,322 | | Less: Restricted cash | $675 | $723 | | Less: Other adjustments | $515 | $1,239 | | Net Cash (Debt) | $(22,947) | $(22,088) | | Net Cash (Debt) of Industrial Activities | $(1,727) | $(16) | Free Cash Flow of Industrial Activities | (in millions of dollars) | 2024 | 2023 | |---|---|---| | Free Cash Flow of Industrial Activities | $(401) | $1,216 | - The company maintains investment-grade credit ratings from S&P (BBB+), Fitch (BBB+), and Moody's (Baa2), although S&P and Fitch revised their outlooks to negative in late 2024/early 2025[375][377][378] - Total available liquidity, including cash, restricted cash, and undrawn committed facilities, was $9.5 billion at the end of 2024, down from $11.2 billion at the end of 2023[389] Critical Accounting Estimates - The allowance for credit losses is a critical estimate. A hypothetical 10% increase in quantitative loss rates would have increased the allowance by approximately $24 million at year-end 2024[466] - Goodwill and indefinite-lived intangible assets are tested for impairment annually. In 2024, an impairment charge of $11 million was recognized for an in-process R&D asset in the Agriculture segment, but no goodwill impairment was found[470][471] - Sales allowances, which reduce revenue, are estimated based on historical data and market conditions. The accrual for these allowances decreased to $2.1 billion in 2024 from $2.4 billion in 2023 due to dealer destocking[473] - The company recognized a $29 million tax benefit from releasing a valuation allowance in China, but this was offset by a $35 million tax expense from recording a new valuation allowance in Argentina due to hyperinflationary impacts[480] Quantitative and Qualitative Disclosures About Market Risk CNH faces credit, currency, and interest rate risks, actively hedging currency exposure, with sensitivity analyses indicating potential financial impacts - A hypothetical 10% adverse change in relevant exchange rates would result in a potential loss in fair value of approximately $113 million on currency derivative instruments held at year-end 2024[250] - A hypothetical 10% increase in short-term interest rates would cause an estimated increase in net expenses before taxes of approximately $20 million on an annual basis for floating rate instruments[258] - The company's policy is to use derivative financial instruments to hedge between 55% and 85% of its forecasted trading transaction exchange risk exposure for the coming 12 months[246] Financial Statements and Supplementary Data This section incorporates by reference the Consolidated Financial Statements, notes thereto, and supplementary data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in inventory controls, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2024, due to a material weakness in internal control over financial reporting[262] - A material weakness was identified related to deficiencies in the operating effectiveness of internal controls over the existence and completeness of raw material and work-in-process inventory[266] - Remediation actions include hiring consulting professionals, performing full physical inventory counts at certain locations in Q4 2025, developing standard operating procedures, and providing enhanced training to personnel[268][270] Other Information None Disclosures Regarding Foreign Jurisdictions that Prevent Inspections None PART III Directors, Executive Officers and Corporate Governance Executive officer information is in Item 1, with further governance details in the 2025 Proxy Statement, and a Code of Conduct is available - Information regarding directors and corporate governance is incorporated by reference from the forthcoming 2025 Annual General Meeting Proxy Statement[286] - The company has adopted a Code of Conduct that applies to its executive officers and is available on its website[287] Executive Compensation The information required by this item will be contained in the Company's Proxy Statement for its 2025 Annual General Meeting Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item will be contained in the Company's Proxy Statement for its 2025 Annual General Meeting Certain Relationships and Related Transactions and Director Independence The information required by this item will be contained in the Company's Proxy Statement for its 2025 Annual General Meeting Principal Accountant Fees and Services The information required by this item will be contained in the Company's Proxy Statement for its 2025 Annual General Meeting PART IV Exhibits and Financial Statement Schedules This section details financial statements, schedules, and exhibits included in the Annual Report on Form 10-K, covering corporate and contractual documents - This section contains the list of financial statements filed with the report, including the Consolidated Statements of Operations, Comprehensive Income, Balance Sheets, Cash Flows, and Changes in Equity, along with the Notes to the Consolidated Financial Statements[294] - A comprehensive list of exhibits is provided, including corporate governance documents, material contracts, and certifications required by the Sarbanes-Oxley Act[296][297] Form 10-K Summary None