News Column

CNH INDUSTRIAL CAPITAL LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 4, 2014

Overview

Organization

We offer a range of financial products and services to the dealers and customers of CNH Industrial North America. The principal products offered are retail financing for the purchase or lease of new and used CNH Industrial North America equipment and wholesale financing to CNH Industrial North America dealers. Wholesale financing consists primarily of floor plan financing as well as financing equipment used in dealer-owned rental yards, parts inventory and working capital needs. In addition, we purchase equipment from dealers that is leased to retail customers under operating lease agreements, and we also finance customers' commercial revolving accounts.

Trends and Economic Conditions

Our business is closely related to the agricultural and construction equipment industries because we offer financing products for such equipment. For the three months ended June 30, 2014, CNH Industrial's worldwide agricultural equipment sales decreased 2.3% compared to the three months ended June 30, 2013. CNH Industrial's worldwide construction equipment sales decreased 0.9% for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

In general, our receivable mix between agricultural and construction equipment financing directionally reflects the mix of equipment sales by CNH Industrial North America. As such, changes in the agricultural industry or with respect to our agricultural equipment borrowers ("farmers") may affect the majority of our portfolio.

During the past few years, farm income in North America has experienced some of its highest historical levels. The financing we provide to our borrowers is secured by the financed equipment, which typically has a long useful life and is a key component in the farmers' sources of income. All of these factors contributed to the strong credit performance of our portfolio in recent periods.

Net income attributable to CNH Industrial Capital LLC was $68.3 million for the three months ended June 30, 2014, down $0.4 million compared to the same period in 2013, mainly driven by a higher provision for credit losses, partially offset by a higher average portfolio. Net income attributable to CNH Industrial Capital LLC was $135.1 million for the six months ended June 30, 2014, compared to $132.1 million for the six months ended June 30, 2013. Net income increased during the six month period primarily due to a higher average portfolio, partially offset by a higher provision for credit losses. The receivables balance greater than 30 days past due as a percentage of managed receivables was 0.3%, 0.4% and 0.4% at June 30, 2014, December 31, 2013 and June 30, 2013, respectively.

Macroeconomic issues for us include the uncertainty of governmental actions in respect to monetary, fiscal and legislative policies, the global economic recovery, capital market disruptions, trade agreements and financial regulatory changes. Significant volatility in the price of certain commodities could also impact CNH Industrial North America's and our results.

42



--------------------------------------------------------------------------------

Table of Contents

Results of Operations

Three and Six Months Ended June 30, 2014 Compared to Three and Six Months Ended June 30, 2013

Revenues

Revenues for the three and six months ended June 30, 2014 and 2013 were as follows (dollars in thousands):

Three Months Ended June 30, 2014 2013 $ Change % Change Interest income on retail notes and finance leases $ 51,091$ 47,336$ 3,755 7.9 % Interest income on wholesale notes 17,326 15,718 1,608 10.2 Interest and other income from affiliates 111,749 100,206 11,543 11.5 Rental income on operating leases 39,721 34,045 5,676 16.7 Other income 13,877 15,027 (1,150 ) (7.7 ) Total revenues $ 233,764$ 212,332$ 21,432 10.1 % Six Months Ended June 30, 2014 2013 $ Change % Change Interest income on retail notes and finance leases $ 99,616$ 93,410$ 6,206 6.6 % Interest income on wholesale notes 32,827 30,377 2,450 8.1



Interest and other income from affiliates 219,099 198,233 20,866 10.5 Rental income on operating leases

76,203 67,172 9,031 13.4 Other income 27,007 28,805 (1,798 ) (6.2 ) Total revenues $ 454,752$ 417,997$ 36,755 8.8 %



Revenues totaled $233.8 million and $454.8 million for the three and six months ended June 30, 2014, respectively, compared to $212.3 million and $418.0 million for the same periods in 2013. A higher average portfolio primarily drove the year-over-year increase, partially offset by a decrease in our average yield. The average yield for retail and other notes, finance leases, wholesale receivables and commercial revolving accounts receivables was 5.5% and 5.7% for the three months ended June 30, 2014 and 2013, respectively, and 5.5% and 5.8% for the six months ended June 30, 2014 and 2013, respectively.

Interest income on retail notes and finance leases for the three and six months ended June 30, 2014 was $51.1 million and $99.6 million, respectively, representing increases of $3.8 million and $6.2 million from the same periods in 2013. For the second quarter, the increase was primarily due to a $5.8 million favorable impact from higher average earning assets, partially offset by a $2.1 million unfavorable impact from lower interest rates. For the six months ended June 30, 2014, compared to the same period in 2013, the increase was primarily due to an $11.7 million favorable impact from higher average earning assets, partially offset by a $5.5 million unfavorable impact from lower interest rates.

Interest income on wholesale notes for the three and six months ended June 30, 2014 was $17.3 million and $32.8 million, representing an increase of $1.6 million and $2.5 million from the same periods in 2013. The increase was primarily due to the favorable impact from higher average earning assets.

Interest and other income from affiliates for the three and six months ended June 30, 2014 was $111.7 million and $219.1 million, respectively, compared to $100.2 million and $198.2 million, respectively, for the three and six months ended June 30, 2013. For the three and six months ended June 30, 2014, compensation from CNH Industrial North America for retail low-rate financing programs and interest

43



--------------------------------------------------------------------------------

Table of Contents

waiver programs offered to customers was $57.3 million and $116.8 million, respectively, an increase of $3.8 million and $8.3 million from the same periods in 2013. The increase was primarily due to higher average earning retail assets. For selected operating leases, compensation from CNH Industrial North America for the difference between market rental rates and the amounts paid by customers was $11.4 million and $21.5 million for the three and six months ended June 30, 2014, an increase of $2.6 million and $4.4 million, respectively, from the same periods in 2013. This increase was primarily due to higher originations. For the three and six months ended June 30, 2014, compensation from CNH Industrial North America for wholesale marketing programs was $43.0 million and $80.8 million, respectively, compared to $37.3 million and $71.3 million, respectively for the same period in 2013. The increase was primarily due to higher average earning wholesale assets.

Rental income on operating leases for the three and six months ended June 30, 2014 was $39.7 million and $76.2 million, respectively, representing increases of $5.7 million and $9.0 million from the same periods in 2013. The second quarter increase was due to a $10.6 million favorable impact from higher average earning assets, partially offset by a $4.9 million unfavorable impact from lower interest rates on new and existing operating leases. The year-to-date increase was due to an $18.6 million favorable impact from higher average earning assets, partially offset by a $9.6 million unfavorable impact from lower interest rates on new and existing operating leases.

Other income for the three and six months ended June 30, 2014 was $13.9 million and $27.0 million, respectively, representing decreases of $1.2 million and $1.8 million from the same periods in 2013. The decreases in 2014 were primarily due to accretion on the retained interests related to the off-book receivables in 2013.

Expenses

Expenses for the three and six months ended June 30, 2014 and 2013 were as follows (dollars in thousands):

Three Months Ended June 30, 2014 2013 $ Change % Change Total interest expense $ 70,669$ 62,932$ 7,737 12.3 % Fees charged by affiliates 12,964 15,378 (2,414 ) (15.7 ) Provision (benefit) for credit losses 5,928 (10,859 ) 16,787 (154.6 ) Depreciation of equipment on operating leases 33,403 28,206 5,197 18.4 Other expenses 9,540 10,188 (648 ) (6.4 ) Total expenses $ 132,504$ 105,845$ 26,659 25.2 % Six Months Ended June 30, 2014 2013 $ Change % Change Total interest expense $ 133,797$ 122,407$ 11,390 9.3 % Fees charged by affiliates 26,331 30,408 (4,077 ) (13.4 ) Provision (benefit) for credit losses 7,388 (7,360 ) 14,748 (200.4 ) Depreciation of equipment on operating leases 63,551 55,377 8,174 14.8 Other expenses 20,551 17,075 3,476 20.4 Total expenses $ 251,618$ 217,907$ 33,711 15.5 %



Interest expense totaled $70.7 million and $133.8 million for the three and six months ended June 30, 2014, respectively, compared to $62.9 million and $122.4 million for the same periods in 2013. For the second quarter, the increase was due to an $8.5 million unfavorable impact from higher average total debt,

44



--------------------------------------------------------------------------------

Table of Contents

partially offset by a $0.8 million favorable impact from lower average interest rates. For the six months, the increase was due to a $16.0 million unfavorable impact from higher average total debt, partially offset by a $4.6 million favorable impact from lower average interest rates.

The provision for credit losses was $5.9 million and $7.4 million for the three and six months ended June 30, 2014, respectively, compared to a benefit of $10.9 million and $7.4 million for the same periods in 2013. The increase for the periods in 2014 was primarily due to a higher average portfolio, while the benefits recognized in 2013 primarily represented collections from certain customers previously identified as impaired.

The effective tax rates for the three months ended June 30, 2014 and 2013 were 32.2% and 35.2%, respectively. The effective tax rate was 33.2% for the six-month period ended June 30, 2014, compared to 33.6% for the same period in 2013. The lower rates in 2014 were primarily due to the favorable discrete tax benefits recorded in the second quarter and the change in the geographic mix of income earned within the U.S.

Receivables and Equipment on Operating Leases Originated and Held

Receivable and equipment on operating lease originations for the three and six months ended June 30, 2014 and 2013 were as follows (dollars in thousands):

Three Months Ended June 30, 2014 2013 $ Change % Change Retail receivables $ 998,091$ 1,040,851$ (42,760 ) (4.1 )% Wholesale receivables 3,750,468 3,734,066 16,402 0.4 Other 269,885 263,004 6,881 2.6 Equipment on operating leases 236,201 130,953 105,248 80.4 Total originations $ 5,254,645$ 5,168,874$ 85,771 1.7 % Six Months Ended June 30, 2014 2013 $ Change % Change Retail receivables $ 1,962,304$ 2,127,016$ (164,712 ) (7.7 )% Wholesale receivables 7,040,559 7,049,447 (8,888 ) (0.1 ) Other 451,615 448,120 3,495 0.8 Equipment on operating leases 388,889 263,431 125,458 47.6 Total originations $ 9,843,367$ 9,888,014$ (44,647 ) (0.5 )%



Retail receivable originations decreased for both the three and six months ended June 30, 2014 compared to the same periods in 2013, primarily due to a decrease in unit sales of CNH Industrial North America equipment. The increase in equipment on operating lease originations for the three and six months ended June 30, 2014 compared to the same period in 2013 was primarily due to financing programs offered in response to the expiration of additional depreciation deductions.

45



--------------------------------------------------------------------------------

Table of Contents

Total receivables and equipment on operating leases held as of June 30, 2014, December 31, 2013 and June 30, 2013 were as follows (dollars in thousands): June 30, December 31, June 30, 2014 2013 2013 Retail receivables $ 8,669,831$ 8,480,893$ 7,686,214 Wholesale receivables 4,567,991 3,573,524 4,023,564 Other 266,891 230,817 269,015 Equipment on operating leases 1,160,431 974,307 830,330 Total receivables and equipment on operating leases $ 14,665,144$ 13,259,541$ 12,809,123



The total retail receivables balance greater than 30 days past due as a percentage of the retail receivables was 0.4%, 0.4% and 0.5% at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. At those same dates, the total wholesale receivables balance greater than 30 days past due as a percentage of the wholesale receivables was not significant. Total retail receivables on nonaccrual status, which represent receivables for which we have ceased accruing finance income, were $23.9 million, $30.2 million and $15.9 million at June 30, 2014, December 31, 2013 and June 30, 2013, respectively. Total wholesale receivables on nonaccrual status were $48.0 million, $30.4 million and $30.7 million at June 30, 2014, December 31, 2013 and June 30, 2013, respectively.

Total receivable write-off amounts and recoveries, by product for the three and six months ended June 30, 2014 and 2013 were as follows (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Write-offs: Retail $ 3,239$ 2,742$ 5,609$ 5,252 Wholesale 548 64 799 127 Other 1,486 1,280 2,710 2,929 Total write-offs 5,273 4,086 9,118 8,308 Recoveries: Retail (674 ) (987 ) (1,255 ) (1,782 ) Wholesale (6 ) (206 ) (55 ) (241 ) Other (615 ) (746 ) (1,151 ) (1,595 ) Total recoveries (1,295 ) (1,939 ) (2,461 ) (3,618 ) Write-offs, net of recoveries: Retail 2,565 1,755 4,354 3,470 Wholesale 542 (142 ) 744 (114 ) Other 871 534 1,559 1,334 Total write-offs, net of recoveries $ 3,978$ 2,147$ 6,657$ 4,690



Our allowance for credit losses on all receivables financed totaled $102.2 million at June 30, 2014, $102.0 million at December 31, 2013 and $109.4 million at June 30, 2013. The level of the allowance is based on quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions, collateral value and credit risk quality. We believe our allowance is sufficient to provide for losses in our receivable portfolio as of June 30, 2014.

46



--------------------------------------------------------------------------------

Table of Contents

Liquidity and Capital Resources

The following discussion of liquidity and capital resources principally focuses on our statements of cash flows, balance sheets and capitalization. CNH Industrial Capital's current funding strategy is to maintain sufficient liquidity and flexible access to a wide variety of financial instruments and funding options.

In the past, securitization has been one of our most economical sources of funding and, therefore, the majority of our originated receivables are securitized, with the cash generated from such receivables utilized to repay the related debt or, in the case of wholesale receivables, to purchase new receivables. We expect securitization to continue to represent a substantial portion of our capital structure.

In addition, we have committed secured and unsecured facilities, unsecured bonds, affiliate borrowings and cash to fund our liquidity and capital needs.

Since 2011, we have accessed the unsecured bond market in order to add more diversity to our funding sources. Our outstanding unsecured senior notes totaled $2.85 billion as of June 30, 2014. We expect continued changes to our funding profile, with less reliance on the securitization market, as costs and terms of accessing the unsecured term market continue to improve.

Cash Flows Six Months Ended June 30, 2014 2013 (in thousands) Cash flows provided by (used in): Operating activities $ 377,564$ 252,196 Investing activities (1,308,769 ) (1,211,609 ) Financing activities 392,290 384,398 Net cash decrease $ (538,915 ) (575,015 )



Operating activities in the six months ended June 30, 2014 generated cash of $378 million, compared to $252 million for the same period in 2013, resulting primarily from net income of $136 million, adjusted by depreciation and amortization of $64 million and cash from working capital of $177 million. The increase in cash provided by operating activities for the six months ended June 30, 2014 compared to 2013 was primarily due to a $107 million net improvement in working capital.

Net cash flows used in investing activities in the six months ended June 30, 2014 totaled $1,309 million, resulting primarily from a net growth in receivables of $1,234 million and $389 million in expenditures for equipment on operating leases, partially offset by a decrease in restricted cash of $176 million and proceeds from the sale of equipment on operating leases of $138 million. The increase of cash used in investing activities in the six months ended June 30, 2014 compared to 2013 was primarily due to the net cash flows for equipment on operating leases.

Financing activities in the six months ended June 30, 2014 generated cash of $392 million, resulting primarily from net proceeds from the net cash received from long-term debt and affiliated debt of $655 million and $183 million, respectively, partially offset by net cash paid of $356 million for short-term borrowings and $90 million in dividends paid to CNH Industrial America. The increase in cash provided by financing activities in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 was primarily due to the increase in net cash received from affiliated debt and lower dividends paid to CNH Industrial America, partially offset by decreased net cash received from long-term debt and increased net payments of short-term borrowings.

47



--------------------------------------------------------------------------------

Table of Contents

Securitization

CNH Industrial Capital and its predecessor entities have been securitizing receivables since 1992. Because this market generally remains a cost-effective financing source and allows access to a wide investor base, we expect to continue utilizing securitization as one of our core sources of funding in the near future. CNH Industrial Capital has completed public and private issuances of asset-backed securities in both the U.S. and Canada and, as of June 30, 2014, the amounts outstanding were approximately $7.9 billion.

Committed Asset-Backed Facilities

CNH Industrial Capital has committed asset-backed facilities with several banks, primarily through their commercial paper conduit programs. Committed asset-backed facilities for the U.S. and Canada totaled $3.3 billion at June 30, 2014, with original borrowing maturities of up to two years. The unused availability under the facilities varies during the year, depending on origination volume and the refinancing of receivables with term securitization transactions and/or other financing. At June 30, 2014, approximately $1.2 billion of funding was available for use under these facilities.

Unsecured Funding and Other Transactions

As of June 30, 2014, we had outstanding unsecured senior notes of $750 million at an annual fixed rate of 3.875% due 2015, $500 million at an annual fixed rate of 6.250% due 2016, $500 million at an annual fixed rate of 3.250% due 2017, $600 million at an annual fixed rate of 3.625% due 2018 and $500 million at an annual fixed rate of 3.375% due 2019.

As of June 30, 2014, we had a $250 million, unsecured credit facility, consisting of a $150 million term facility and a $100 million revolving credit facility, with a final maturity in July 2016. Additionally, as of June 30, 2014, we had a $250 million, unsecured credit facility with a consortium of banks, with a final maturity in June 2017.

Affiliate Sources

CNH Industrial Capital borrows, as needed, from CNH Industrial. This source of funding is primarily used to finance various on-book assets and provides additional flexibility when evaluating market conditions and potential third-party financing options. We have obtained financing from CNHI treasury subsidiaries and, from time to time, have entered into term loan agreements. At June 30, 2014, affiliated debt was $533.4 million, up from $351.0 million at December 31, 2013.

Equity Position

Our equity position also supports our capabilities to access various funding sources. Our stockholder's equity as of June 30, 2014 and December 31, 2013 was $1.6 billion and $1.5 billion, respectively.

On March 31, 2014, CNH Industrial Capital LLC paid a dividend of $90 million to CNH Industrial America.

Liquidity

The vast majority of CNH Industrial Capital's debt is self-liquidating from the cash generated by the underlying amortizing receivables. Normally, additional liquidity should not be necessary for the repayment of such debt. New originations of retail receivables are usually warehoused in committed asset-backed facilities until refinanced in the term ABS market or with other third-party debt. New wholesale

48



--------------------------------------------------------------------------------

Table of Contents

receivables are typically financed through a master trust and funded by variable funding notes or on a term basis. Our liquidity available for use as of June 30, 2014 is as follows (dollars in thousands):

June 30, 2014 Cash, cash equivalents and restricted cash $ 766,816 Committed asset-backed facilities 3,301,062 Committed unsecured facilities 350,000 Total cash and facilities 4,417,878 Less: restricted cash 608,123 Less: facilities utilization 2,061,029 Total available for use $ 1,748,726



The liquidity available for use varies due to changes in origination volumes, reflecting the financing needs of our customers, and is influenced by the timing of any refinancing of underlying receivables.

In connection with a limited number of funding transactions, we provide financial guarantees to various parties on behalf of certain foreign financial services subsidiaries of CNHI for approximately $273.6 million as of June 30, 2014.

Cautionary Note Regarding Forward-Looking Statements

All statements other than statements of historical fact contained in this quarterly report, including statements regarding our competitive strengths; business strategy; future financial position or operating results; budgets; projections with respect to revenue, income, capital expenditures, capital structure or other financial items; costs; and plans and objectives of management regarding operations, products and services, are forward-looking statements. These statements may include terminology such as "may," "will," "expect," "could," "should," "intend," "estimate," "anticipate," "believe," "outlook," "continue," "remain," "on track," "design," "target," "objective," "goal," or similar terminology.

Our outlook is predominantly based on our interpretation of what we consider to be key economic assumptions and involves risks and uncertainties that could cause actual results to differ (possibly materially) from such forward looking statements. Macroeconomic factors including monetary policy, interest rates, currency exchange rates, inflation, deflation, credit availability and government intervention in an attempt to influence such factors may have a material impact on our customers and the demand for our financing products and services. The demand for CNH Industrial North America's products and, in turn, our financing products and services is influenced by a number of factors, including, among other things: general economic conditions; demand for food; commodity prices, raw material and component prices and stock levels; net farm income levels; availability of credit; developments in biofuels; infrastructure spending rates; housing starts; commercial construction; seasonality of demand; changes and uncertainties in the monetary and fiscal policies of various governmental and regulatory entities; CNH Industrial North America's ability to maintain key dealer relationships; currency exchange rates and interest rates; pricing policies by CNH Industrial North America or its competitors; political, economic and legislative changes; and the other risks described in "Risk Factors" in our most recent annual report on Form 10-K. Some of the other significant factors which may affect our results include our access to credit, restrictive covenants in our debt agreements, actions by rating agencies concerning the ratings on our debt and asset-backed securities and the credit rating of CNHI, weather, climate change and natural disasters, actions taken by our competitors, the effect of changes in laws and regulations, the results of legal proceedings and employee relations.

Furthermore, in light of ongoing economic uncertainty, both globally and in the industries in which we operate, it is particularly difficult to forecast our results and any estimates or forecasts of particular periods

49



--------------------------------------------------------------------------------

Table of Contents

that we provide are uncertain. We can give no assurance that the expectations reflected in our forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in these forward-looking statements. All written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the factors we disclose that could cause our actual results to differ materially from our expectations. We undertake no obligation to update or revise publicly any forward-looking statements.

Critical Accounting Policies and Estimates

See our critical accounting policies and estimates discussed in our annual report for the year ended December 31, 2013 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to our audited consolidated financial statements included in such annual report. There were no material changes to these policies or estimates during the three months ended June 30, 2014.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," which provides guidance for revenue recognition. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. This guidance will be effective for annual reporting periods beginning after December 15, 2016, and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the adoption impact of this ASU on our consolidated financial statements.

50



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters