Interim Report
for the period ended September 30, 2018
Third Quarter 2018
CONTENTS
BOARD OF DIRECTORS AND AUDITOR | |
INTERIM REPORT ON OPERATIONS | |
GENERAL | |
RESULTS OF OPERATIONS | |
CONDENSED STATEMENT OF FINANCIAL POSITION BY ACTIVITY | |
LIQUIDITY AND CAPITAL RESOURCES | |
2018 U.S. GAAP OUTLOOK | |
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 2018 | |
Condensed Consolidated Income Statement | |
Condensed Consolidated Statement of Comprehensive Income | |
Condensed Consolidated Statement of Financial Position | |
Condensed Consolidated Statement of Cash Flows | |
Condensed Consolidated Statement of Changes in Equity | |
Notes | |
Also available at www.cnhindustrial.com
CNH Industrial N.V.
Corporate Seat: Amsterdam, the Netherlands
Principal Office: 25 St. James’s Street, London, SW1A 1HA, United Kingdom
Share Capital: €17,608,744.72 (as of September 30, 2018)
Amsterdam Chamber of Commerce: reg. no. 56532474
Contents 1
BOARD OF DIRECTORS AND
AUDITOR
BOARD OF DIRECTORS Chairman(a) Suzanne Heywood(2)(3) Directors Mina Gerowin(2)(**) Léo W. Houle(2)(3)(*) Peter Kalantzis(1)(3)(**) John Lanaway(1)(**) Silke C. Scheiber(1)(**) Guido Tabellini(3)(**) Jacqueline A. Tammenoms Bakker(2)(**) Jacques Theurillat(1)(**) | Chief Executive Officer(b) Hubertus M. Mühlhäuser INDEPENDENT AUDITOR Ernst & Young Accountants LLP |
(a) | Mr. Sergio Marchionne has been Chairman until July 21, 2018. On July 21, 2018, the Board of Directors appointed Ms. Suzanne Heywood as Chairman with immediate effect. The appointment of Ms. Heywood as Executive Director will be subject to the approval of the Extraordinary General Meeting of Shareholders to be held on November 29, 2018. |
(b) | Mr. Richard J. Tobin has been Chief Executive Officer and member of the Board until April 27, 2018. The Board of Directors appointed Mr. Derek Neilson as Interim Chief Executive Officer effective as of April 27, 2018. Mr. Neilson, who was not a member of the Board, served in such position till September 17, 2018, the date of appointment of Mr. Hubertus M. Mühlhäuser as Chief Executive Officer. The appointment of Mr. Mühlhäuser to the Company’s Board of Directors as Executive Director will be subject to the approval of the Extraordinary General Meeting of Shareholders to be held on November 29, 2018. |
(1) Member of the Audit Committee
(2) Member of the Governance and Sustainability Committee
(3) Member of the Compensation Committee
(*) | Independent Director and Senior Non-Executive Director |
(**) | Independent Director |
Disclaimer
All statements other than statements of historical fact contained in this filing, including statements regarding our competitive strengths; business strategy; future financial position or operating results; budgets; projections with respect to revenue, income, earnings (or loss) per share, capital expenditures, dividends, capital structure or other financial items; costs; and plans and objectives of management regarding operations and products, 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”, “forecast”, “projection”, “prospects”, “plan”, or similar terminology. Forward-looking statements are not guarantees of future performance. Rather, they are based on current views and assumptions and involve known and unknown risks, uncertainties and other factors, many of which are outside our control and are difficult to predict. If any of these risks and uncertainties materialize or other assumptions underlying any of the forward-looking statements prove to be incorrect, the actual results or developments may differ materially from any future results or developments expressed or implied by the forward-looking statements.
Factors, risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements include, among others: the many interrelated factors that affect consumer confidence and worldwide demand for capital goods and capital goods-related products; general economic conditions in each of our markets; changes in government policies regarding banking, monetary and fiscal policies; legislation, particularly relating to capital goods-related issues such as agriculture, the environment, debt relief and subsidy program policies, trade and commerce and infrastructure development; government policies on international trade and investment, including sanctions, import quotas, capital controls and tariffs; actions of competitors in the various industries in which we compete; development and use of new technologies and technological difficulties; the interpretation of, or adoption of new, compliance requirements with respect to engine emissions, safety or other aspects of our products; production difficulties, including capacity and supply constraints and excess inventory levels; labor relations; interest rates and currency exchange rates; inflation and deflation; energy prices; prices for agricultural commodities; housing starts and other construction activity; our ability to obtain financing or to refinance existing debt; a decline in the price of used vehicles; the resolution of pending litigation and investigations on a wide range of topics, including dealer and supplier litigation, follow-on private litigation in various jurisdictions after the settlement of the EU antitrust investigation announced on July 19, 2016, intellectual property rights disputes, product warranty and defective product claims, and emissions and/or fuel economy regulatory and contractual issues; the Company’s pension plans and other post-employment obligations; political and civil unrest; volatility and deterioration of capital and financial markets, including possible effects of “Brexit”, terror attacks in Europe and elsewhere, and other similar risks and uncertainties and our success in managing the risks involved in the foregoing. Further information concerning factors, risks, and uncertainties that could materially affect CNH Industrial’s financial results is included in CNH Industrial N.V.’s EU Annual Report at December 31, 2017, prepared in accordance with EU-IFRS and in its annual report on Form 20-F for the year ended December 31, 2017, prepared in accordance with U.S. GAAP. Investors should refer to and consider the incorporated information on risks, factors, and uncertainties in addition to the information presented here.
Forward-looking statements are based upon assumptions relating to the factors described in this filing, which are sometimes based upon estimates and data received from third parties. Such estimates and data are often revised. Our actual results could differ materially from those anticipated in such forward-looking statements. Forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update or revise publicly our forward-looking statements.
Further information concerning CNH Industrial and its businesses, including factors that potentially could materially affect CNH Industrial’s financial results, is included in CNH Industrial’s reports and filings with the U.S. Securities and Exchange Commission (“SEC”), the Autoriteit Financiële Markten (“AFM”) and Commissione Nazionale per le Società e la Borsa (“CONSOB”).
All future written and oral forward-looking statements by CNH Industrial or persons acting on the behalf of CNH Industrial are expressly qualified in their entirety by the cautionary statements contained herein or referred to above.
Board of Directors and Auditor 2
INTERIM REPORT ON OPERATIONS
(Unaudited)
GENERAL
CNH Industrial N.V. (the “Company” and collectively with its subsidiaries, “CNH Industrial” or the “CNH Industrial Group” or the “Group”) is incorporated in, and under the laws of, the Netherlands and has its corporate seat in Amsterdam, the Netherlands, and its principal office in London, England, United Kingdom. The Company was formed by the business combination transaction, completed on September 29, 2013, between Fiat Industrial S.p.A. (“Fiat Industrial”) and its majority owned subsidiary CNH Global N.V. (“CNH Global”). Unless otherwise indicated or the context otherwise requires, the terms “we”, “us” and “our” refer to CNH Industrial N.V. together with its consolidated subsidiaries.
CNH Industrial reports quarterly and annual consolidated financial results in accordance with accounting standards generally accepted in the United States (“U.S. GAAP”) for U.S. Securities and Exchange Commission (“SEC”) reporting purposes, and in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and adopted by the European Union (“EU-IFRS”) for European listing proposes and for Dutch law requirements. The reconciliation from EU-IFRS figures to U.S. GAAP is presented, on a voluntary basis, in the Notes to the Interim Condensed Consolidated Financial Statements.
Financial information included in this Interim Report has been prepared in accordance with EU-IFRS. This Interim Report is prepared using the U.S. dollar as the presentation currency, and with segment reporting based on the following five operating segments:
▪ | Agricultural Equipment designs, manufactures and distributes a full line of farm machinery and implements, including two-wheel and four-wheel drive tractors, crawler tractors (Quadtrac®), combines, cotton pickers, grape and sugar cane harvesters, hay and forage equipment, planting and seeding equipment, soil preparation and cultivation implements and material handling equipment. Agricultural equipment is sold under the New Holland Agriculture and Case IH Agriculture brands, as well as the STEYR brand in Europe and the Miller brand, primarily in North America and Australia. Following the acquisition of the grass and soil implement business of Kongskilde Industries in February 2017, certain agricultural equipment products have been sold under the Kongskilde, Överum, and JF brands. |
▪ | Construction Equipment designs, manufactures and distributes a full line of construction equipment including excavators, crawler dozers, graders, wheel loaders, backhoe loaders, skid steer loaders, compact track loaders and telehandlers. Construction equipment is sold under the CASE Construction and New Holland Construction Equipment brands. |
▪ | Commercial Vehicles designs, manufactures and distributes a full range of light, medium, and heavy vehicles for the transportation and distribution of goods under the IVECO brand, commuter buses and touring coaches under the IVECO BUS (previously Iveco Irisbus) and Heuliez Bus brands, quarry and mining equipment under the IVECO ASTRA brand, firefighting vehicles under the Magirus brand, and vehicles for civil defense and peace-keeping missions under the Iveco Defence Vehicles brand. |
▪ | Powertrain designs, manufactures and distributes a range of engines, transmission systems and axles for on- and off-road applications, as well as for marine and power generation under the FPT Industrial brand. |
▪ | Financial Services offers a range of financial services to dealers and customers. Financial Services provides and administers retail financing to customers for the purchase or lease of new and used industrial equipment or vehicles and other equipment sold by CNH Industrial dealers. In addition, Financial Services provides wholesale financing to CNH Industrial dealers. Wholesale financing consists primarily of floor plan financing and allows the dealers to purchase and maintain a representative inventory of products. |
Certain financial information in this report has been presented by geographic area. Our geographic regions are: (1) NAFTA; (2) EMEA; (3) LATAM and (4) APAC. The geographic designations have the following meanings:
▪ | NAFTA: United States, Canada and Mexico; |
▪ | EMEA: member countries of the European Union, member countries of the European Free Trade Association (“EFTA”), Ukraine, Balkans, African continent and the Middle East (excluding Turkey); |
▪ | LATAM: Central and South America, and the Caribbean Islands; and |
▪ | APAC: Continental Asia (including Turkey and Russia), Oceania and member countries of the Commonwealth of Independent States (excluding Ukraine). |
This Interim Report is unaudited.
Interim Report on Operations 3
Alternative performance measures (or “Non-GAAP financial measures”)
We monitor our operations through the use of several non-GAAP financial measures. We believe that these non-GAAP financial measures provide useful and relevant information regarding our results and allow management and investors to assess CNH Industrial’s and our segments’ operating trends, financial performance and financial position. Management uses these non-GAAP financial measures to identify operational trends, as well as make decisions regarding future spending, resource allocations and other operational decisions as they provide additional transparency with respect to our and our business segments’ core operations. These non-GAAP financial measures have no standardized meaning presented in EU-IFRS and are unlikely to be comparable to other similarly titled measures used by other companies due to potential differences between the companies in calculations. As a result, the use of these non-GAAP financial measures has limitations and they should not be considered as substitutes for measures of financial performance and financial position as prepared in accordance with EU-IFRS.
Our non-GAAP financial measures are defined as follows(*):
▪ | Adjusted EBIT under EU-IFRS: is defined as profit/(loss) before taxes, financial income/(expense) of Industrial Activities, restructuring costs, and certain non-recurring items. In particular, non-recurring items are specifically disclosed items that management considers to be rare or discrete events that are infrequent in nature and not reflective of on-going operational activities. |
▪ | Adjusted EBITDA under EU-IFRS: is defined as Adjusted EBIT plus depreciation and amortization (including on assets sold under operating leases and assets sold under buy-back commitments). |
▪ | Adjusted EBIT under U.S. GAAP: is derived from financial information prepared in accordance with U.S. GAAP and is defined as net income (loss) before income taxes, interest expenses of Industrial Activities, net, restructuring expenses, the finance and non-service component of pension and other post-employment benefit costs, foreign exchange gains/(losses), and certain non-recurring items. |
▪ | Adjusted EBITDA under U.S. GAAP: is derived from financial information prepared in accordance with U.S. GAAP and is defined as Adjusted EBIT plus depreciation and amortization (including on assets sold under operating leases and assets sold under buy-back commitments). |
▪ | Adjusted Net Income (Loss) under U.S. GAAP: is derived from financial information prepared in accordance with U.S. GAAP and is defined as net income (loss), less restructuring charges and non-recurring items, after tax. |
▪ | Adjusted Diluted EPS under U.S. GAAP: is derived from financial information prepared in accordance with U.S. GAAP and is computed by dividing Adjusted Net Income (loss) attributable to CNH Industrial N.V. by a weighted-average number of common shares outstanding during the period that takes into consideration potential common shares outstanding deriving from the CNH Industrial share-based payment awards, when inclusion is not anti-dilutive. When we provide guidance for adjusted diluted EPS, we do not provide guidance on a earnings per share basis because the GAAP measure will include potentially significant items that have not yet occurred and are difficult to predict with reasonable certainty prior to year-end. |
▪ | Net Debt and Net Debt of Industrial Activities (or Net Industrial Debt) under EU-IFRS: Net Debt is defined as total debt plus other financial liabilities, net of cash and cash equivalents, current securities and other financial assets. We provide the reconciliation of Net Debt to Total Debt, which is the most directly comparable GAAP financial measure included in our consolidated statement of financial position. Due to different sources of cash flows used for the repayment of the debt between Industrial Activities and Financial Services (by cash from operations for Industrial Activities and by collection of financing receivables for Financial Services), management separately evaluates the cash flow performance of Industrial Activities using Net Debt of Industrial Activities. |
▪ | Net Debt and Net Debt of Industrial Activities (or Net Industrial Debt) under U.S. GAAP: are derived from financial information prepared in accordance with U.S. GAAP. Net Debt under U.S. GAAP is defined as total debt less intersegment notes receivable, cash and cash equivalents, restricted cash and derivative hedging debt. |
▪ | Available Liquidity: is defined as cash and cash equivalents plus restricted cash and undrawn committed facilities. |
▪ | Change excl. FX or Constant Currency: we discuss the fluctuations in revenues on a constant currency basis by applying the prior year average exchange rates to current year’s revenues expressed in local currency in order to eliminate the impact of foreign exchange rate fluctuations. |
(*) Refer to “Results of Operations” for additional information on changes to “Non-GAAP financial measures” occurred in 2018.
Interim Report on Operations 4
RESULTS OF OPERATIONS
Adoption of new accounting standards and Other financial presentation changes
Effective January 1, 2018, CNH Industrial has adopted the following accounting standards: IFRS 15 – Revenue from Contracts with Customers and IFRS 9 – Financial Instruments.
IFRS 15 represents a new framework for recognizing revenue from contracts with customers and includes additional disclosure requirements. CNH Industrial has applied the new revenue recognition standard using the full retrospective approach, adjusting the net equity at January 1, 2017 (date of first time retrospective adoption) due to certain services (mainly maintenance and repair contracts, as well as extended warranty contracts) and certain other incentives provided by CNH Industrial to customers which require a different timing of recognition of revenues and margin. Furthermore, the adoption of the new standard also resulted in changes in classification between net revenues and cost of sales, whose overall impact on total net revenues is not significant, as well as certain further changes in classification for certain assets and liabilities, whose overall impact on total assets and total liabilities is not significant. 2017 figures have been recast accordingly for comparison purposes.
IFRS 9 includes requirements for classification and measurement of financial instruments, impairment of financial assets, and general hedge accounting. CNH Industrial has adopted IFRS 9 retrospectively, except for hedge accounting which was applied prospectively, without recasting prior periods, and adjusting the net equity at January 1, 2018. The impact of the new standard relates to the change in the impairment model from an “incurred loss” to an “expected loss”.
For additional information relating the impacts of adoption of the new accounting standards, refer to the paragraph “New standards and amendments effective from January 1, 2018” in the Notes to the Interim Condensed Consolidated Financial Statements at September 30, 2018.
Furthermore, concurrently with the change in accounting standards, CNH Industrial reviewed the metrics on which the operating segments will be assessed. Effective January 1, 2018, the Chief Operating Decision Maker (“CODM”) began to assess segment performance and make decisions about resource allocation based upon Adjusted EBIT and Adjusted EBITDA calculated using accounting standards generally accepted in the United States. As such, we have introduced Adjusted EBIT and Adjusted EBITDA as new non-GAAP financial measures this year. With reference to Financial Services, the CODM continues to assess the performance of the segment on the basis of net income prepared in accordance with U.S. GAAP. As a consequence, starting from the Interim Report for the quarter ended March 31, 2018, CNH Industrial no longer reports trading profit and operating profit on the face of the income statement.
Furthermore, starting from the Interim Report for the quarter ended March 31, 2018, CNH Industrial is no longer presenting the separate line item Other unusual income/(expenses) within the income statement. All amounts previously reported within this item have been reclassified into the line item Other income/(expenses) within the income statement. This reclassification had no effect on the Group’s results of operations, financial position or cash flows.
Interim Report on Operations 5
The following table summarizes the unaudited impact of adoption of IFRS 15 and the impact of the changes to the income statement presentation on the consolidated income statement for the three months ended September 30, 2017:
Three Months Ended September 30, 2017 Consolidated | ||||||||||
($ million) | As previously reported | Impact of IFRS 15 adoption | Income statement presentation changes | As recast | ||||||
Net revenues | 6,742 | (72 | ) | — | 6,670 | Net revenues | ||||
Cost of sales | 5,569 | (74 | ) | — | 5,495 | Cost of sales | ||||
Selling, general and administrative costs | 535 | — | — | 535 | Selling, general and administrative costs | |||||
Research and development costs | 265 | — | — | 265 | Research and development costs | |||||
23 | 23 | Result from investments | ||||||||
Other income/(expenses) | (34 | ) | — | 34 | ||||||
TRADING PROFIT/(LOSS) | 339 | 2 | (341 | ) | ||||||
Gains/(losses) on the disposal of investments | — | — | — | — | Gains/(losses) on the disposal of investments | |||||
Restructuring costs | 53 | — | — | 53 | Restructuring costs | |||||
Other unusual income/(expenses) | — | — | — | |||||||
OPERATING PROFIT/(LOSS) | 286 | 2 | (288 | ) | ||||||
Financial income/(expenses) | (191 | ) | — | 191 | ||||||
Result from investments | 23 | — | (23 | ) | ||||||
(34 | ) | (34 | ) | Other income/(expenses) | ||||||
(191 | ) | (191 | ) | Financial income/(expenses) | ||||||
PROFIT/(LOSS) BEFORE TAXES | 118 | 2 | — | 120 | PROFIT/(LOSS) BEFORE TAXES | |||||
Income tax (expense) | (74 | ) | 1 | — | (73 | ) | Income tax (expense) | |||
PROFIT/(LOSS) FOR THE PERIOD | 44 | 3 | — | 47 | PROFIT/(LOSS) FOR THE PERIOD | |||||
Result from intersegment investments | — | — | — | — | Result from intersegment investments | |||||
PROFIT/(LOSS) FOR THE PERIOD | 44 | 3 | — | 47 | PROFIT/(LOSS) FOR THE PERIOD | |||||
Interim Report on Operations 6
The following table summarizes the unaudited impact of adoption of IFRS 15 and the impact of the changes to the income statement presentation on the Industrial Activities income statement for the three months ended September 30, 2017:
Three Months Ended September 30, 2017 Industrial Activities | ||||||||||
($ million) | As previously reported | Impact of IFRS 15 adoption | Income statement presentation changes | As recast | ||||||
Net revenues | 6,392 | (153 | ) | — | 6,239 | Net revenues | ||||
Cost of sales | 5,381 | (155 | ) | — | 5,226 | Cost of sales | ||||
Selling, general and administrative costs | 492 | — | — | 492 | Selling, general and administrative costs | |||||
Research and development costs | 265 | — | — | 265 | Research and development costs | |||||
16 | 16 | Result from investments | ||||||||
Other income/(expenses) | (34 | ) | — | 34 | ||||||
TRADING PROFIT/(LOSS) | 220 | 2 | (222 | ) | ||||||
Gains/(losses) on the disposal of investments | — | — | — | — | Gains/(losses) on the disposal of investments | |||||
Restructuring costs | 53 | — | — | 53 | Restructuring costs | |||||
Other unusual income/(expenses) | — | — | — | |||||||
OPERATING PROFIT/(LOSS) | 167 | 2 | (169 | ) | ||||||
Financial income/(expenses) | (191 | ) | — | 191 | ||||||
Result from investments | 16 | — | (16 | ) | ||||||
(34 | ) | (34 | ) | Other income/(expenses) | ||||||
(191 | ) | (191 | ) | Financial income/(expenses) | ||||||
PROFIT/(LOSS) BEFORE TAXES | (8 | ) | 2 | — | (6 | ) | PROFIT/(LOSS) BEFORE TAXES | |||
Income tax (expense) | (29 | ) | 1 | — | (28 | ) | Income tax (expense) | |||
PROFIT/(LOSS) FOR THE PERIOD | (37 | ) | 3 | — | (34 | ) | PROFIT/(LOSS) FOR THE PERIOD | |||
Result from intersegment investments | 81 | — | — | 81 | Result from intersegment investments | |||||
PROFIT/(LOSS) FOR THE PERIOD | 44 | 3 | — | 47 | PROFIT/(LOSS) FOR THE PERIOD | |||||
Interim Report on Operations 7
The following table summarizes the unaudited impact of adoption of IFRS 15 and the impact of the changes to the income statement presentation on the Financial Services income statement for the three months ended September 30, 2017:
Three Months Ended September 30, 2017 Financial Services | ||||||||||
($ million) | As previously reported | Impact of IFRS 15 adoption | Income statement presentation changes | As recast | ||||||
Net revenues | 481 | (3 | ) | — | 478 | Net revenues | ||||
Cost of sales | 319 | (3 | ) | — | 316 | Cost of sales | ||||
Selling, general and administrative costs | 43 | — | — | 43 | Selling, general and administrative costs | |||||
Research and development costs | — | — | — | — | Research and development costs | |||||
7 | 7 | Result from investments | ||||||||
Other income/(expenses) | — | — | — | |||||||
TRADING PROFIT/(LOSS) | 119 | — | (119 | ) | ||||||
Gains/(losses) on the disposal of investments | — | — | — | — | Gains/(losses) on the disposal of investments | |||||
Restructuring costs | — | — | — | — | Restructuring costs | |||||
Other unusual income/(expenses) | — | — | — | |||||||
OPERATING PROFIT/(LOSS) | 119 | — | (119 | ) | ||||||
Financial income/(expenses) | — | — | — | |||||||
Result from investments | 7 | — | (7 | ) | ||||||
— | — | Other income/(expenses) | ||||||||
— | — | Financial income/(expenses) | ||||||||
PROFIT/(LOSS) BEFORE TAXES | 126 | — | — | 126 | PROFIT/(LOSS) BEFORE TAXES | |||||
Income tax (expense) | (45 | ) | — | — | (45 | ) | Income tax (expense) | |||
PROFIT/(LOSS) FOR THE PERIOD | 81 | — | — | 81 | PROFIT/(LOSS) FOR THE PERIOD | |||||
Result from intersegment investments | — | — | — | — | Result from intersegment investments | |||||
PROFIT/(LOSS) FOR THE PERIOD | 81 | — | — | 81 | PROFIT/(LOSS) FOR THE PERIOD | |||||
The following table summarizes the unaudited impact of adoption of IFRS 15 on the net revenues for the three months ended September 30, 2017, broken down by segment:
Three Months Ended September 30, 2017 | ||||||
($ million) | As previously reported | Impact of IFRS 15 adoption | As recast | |||
Agricultural Equipment | 2,651 | (104 | ) | 2,547 | ||
Construction Equipment | 642 | (24 | ) | 618 | ||
Commercial Vehicles | 2,598 | (25 | ) | 2,573 | ||
Powertrain | 1,075 | — | 1,075 | |||
Eliminations and Other | (574 | ) | — | (574 | ) | |
Total Net revenues of Industrial Activities | 6,392 | (153 | ) | 6,239 | ||
Financial Services | 481 | (3 | ) | 478 | ||
Eliminations and Other | (131 | ) | 84 | (47 | ) | |
Total Net revenues | 6,742 | (72 | ) | 6,670 | ||
Interim Report on Operations 8
The following table summarizes the unaudited impact of adoption of IFRS 15 and the impact of the changes to the income statement presentation on the consolidated income statement for the nine months ended September 30, 2017:
Nine Months Ended September 30, 2017 Consolidated | ||||||||||
($ million) | As previously reported | Impact of IFRS 15 adoption | Income statement presentation changes | As recast | ||||||
Net revenues | 19,665 | (246 | ) | — | 19,419 | Net revenues | ||||
Cost of sales | 16,205 | (233 | ) | — | 15,972 | Cost of sales | ||||
Selling, general and administrative costs | 1,609 | — | — | 1,609 | Selling, general and administrative costs | |||||
Research and development costs | 760 | — | — | 760 | Research and development costs | |||||
71 | 71 | Result from investments | ||||||||
Other income/(expenses) | (74 | ) | — | 74 | ||||||
TRADING PROFIT/(LOSS) | 1,017 | (13 | ) | (1,004 | ) | |||||
Gains/(losses) on the disposal of investments | — | — | — | — | Gains/(losses) on the disposal of investments | |||||
Restructuring costs | 76 | — | — | 76 | Restructuring costs | |||||
Other unusual income/(expenses) | 8 | — | (8 | ) | ||||||
OPERATING PROFIT/(LOSS) | 949 | (13 | ) | (936 | ) | |||||
Financial income/(expenses) | (483 | ) | — | 483 | ||||||
Result from investments | 71 | — | (71 | ) | ||||||
(66 | ) | (66 | ) | Other income/(expenses) | ||||||
(483 | ) | (483 | ) | Financial income/(expenses) | ||||||
PROFIT/(LOSS) BEFORE TAXES | 537 | (13 | ) | — | 524 | PROFIT/(LOSS) BEFORE TAXES | ||||
Income tax (expense) | (236 | ) | 2 | — | (234 | ) | Income tax (expense) | |||
PROFIT/(LOSS) FOR THE PERIOD | 301 | (11 | ) | — | 290 | PROFIT/(LOSS) FOR THE PERIOD | ||||
Result from intersegment investments | — | — | — | — | Result from intersegment investments | |||||
PROFIT/(LOSS) FOR THE PERIOD | 301 | (11 | ) | — | 290 | PROFIT/(LOSS) FOR THE PERIOD | ||||
Interim Report on Operations 9
The following table summarizes the unaudited impact of adoption of IFRS 15 and the impact of the changes to the income statement presentation on the Industrial Activities income statement for the nine months ended September 30, 2017:
Nine Months Ended September 30, 2017 Industrial Activities | ||||||||||
($ million) | As previously reported | Impact of IFRS 15 adoption | Income statement presentation changes | As recast | ||||||
Net revenues | 18,544 | (489 | ) | — | 18,055 | Net revenues | ||||
Cost of sales | 15,574 | (476 | ) | — | 15,098 | Cost of sales | ||||
Selling, general and administrative costs | 1,484 | — | — | 1,484 | Selling, general and administrative costs | |||||
Research and development costs | 760 | — | — | 760 | Research and development costs | |||||
51 | 51 | Result from investments | ||||||||
Other income/(expenses) | (70 | ) | — | 70 | ||||||
TRADING PROFIT/(LOSS) | 656 | (13 | ) | (643 | ) | |||||
Gains/(losses) on the disposal of investments | — | — | — | — | Gains/(losses) on the disposal of investments | |||||
Restructuring costs | 74 | — | — | 74 | Restructuring costs | |||||
Other unusual income/(expenses) | 8 | — | (8 | ) | ||||||
OPERATING PROFIT/(LOSS) | 590 | (13 | ) | (577 | ) | |||||
Financial income/(expenses) | (483 | ) | — | 483 | ||||||
Result from investments | 51 | — | (51 | ) | ||||||
(62 | ) | (62 | ) | Other income/(expenses) | ||||||
(483 | ) | (483 | ) | Financial income/(expenses) | ||||||
PROFIT/(LOSS) BEFORE TAXES | 158 | (13 | ) | — | 145 | PROFIT/(LOSS) BEFORE TAXES | ||||
Income tax (expense) | (114 | ) | 2 | — | (112 | ) | Income tax (expense) | |||
PROFIT/(LOSS) FOR THE PERIOD | 44 | (11 | ) | — | 33 | PROFIT/(LOSS) FOR THE PERIOD | ||||
Result from intersegment investments | 257 | — | — | 257 | Result from intersegment investments | |||||
PROFIT/(LOSS) FOR THE PERIOD | 301 | (11 | ) | — | 290 | PROFIT/(LOSS) FOR THE PERIOD | ||||
Interim Report on Operations 10
The following table summarizes the unaudited impact of adoption of IFRS 15 and the impact of the changes to the income statement presentation on the Financial Services income statement for the nine months ended September 30, 2017:
Nine Months Ended September 30, 2017 Financial Services | ||||||||||
($ million) | As previously reported | Impact of IFRS 15 adoption | Income statement presentation changes | As recast | ||||||
Net revenues | 1,498 | (6 | ) | — | 1,492 | Net revenues | ||||
Cost of sales | 1,008 | (6 | ) | — | 1,002 | Cost of sales | ||||
Selling, general and administrative costs | 125 | — | — | 125 | Selling, general and administrative costs | |||||
Research and development costs | — | — | — | — | Research and development costs | |||||
20 | 20 | Result from investments | ||||||||
Other income/(expenses) | (4 | ) | — | 4 | ||||||
TRADING PROFIT/(LOSS) | 361 | — | (361 | ) | ||||||
Gains/(losses) on the disposal of investments | — | — | — | — | Gains/(losses) on the disposal of investments | |||||
Restructuring costs | 2 | — | — | 2 | Restructuring costs | |||||
Other unusual income/(expenses) | — | — | — | |||||||
OPERATING PROFIT/(LOSS) | 359 | — | (359 | ) | ||||||
Financial income/(expenses) | — | — | — | |||||||
Result from investments | 20 | — | (20 | ) | ||||||
(4 | ) | (4 | ) | Other income/(expenses) | ||||||
— | — | Financial income/(expenses) | ||||||||
PROFIT/(LOSS) BEFORE TAXES | 379 | — | — | 379 | PROFIT/(LOSS) BEFORE TAXES | |||||
Income tax (expense) | (122 | ) | — | — | (122 | ) | Income tax (expense) | |||
PROFIT/(LOSS) FOR THE PERIOD | 257 | — | — | 257 | PROFIT/(LOSS) FOR THE PERIOD | |||||
Result from intersegment investments | — | — | — | — | Result from intersegment investments | |||||
PROFIT/(LOSS) FOR THE PERIOD | 257 | — | — | 257 | PROFIT/(LOSS) FOR THE PERIOD | |||||
The following table summarizes the unaudited impact of adoption of IFRS 15 on the net revenues for the nine months ended September 30, 2017, broken down by segment:
Nine Months Ended September 30, 2017 | ||||||
($ million) | As previously reported | Impact of IFRS 15 adoption | As recast | |||
Agricultural Equipment | 7,890 | (337 | ) | 7,553 | ||
Construction Equipment | 1,841 | (71 | ) | 1,770 | ||
Commercial Vehicles | 7,376 | (80 | ) | 7,296 | ||
Powertrain | 3,214 | (1 | ) | 3,213 | ||
Eliminations and Other | (1,777 | ) | — | (1,777 | ) | |
Total Net revenues of Industrial Activities | 18,544 | (489 | ) | 18,055 | ||
Financial Services | 1,498 | (6 | ) | 1,492 | ||
Eliminations and Other | (377 | ) | 249 | (128 | ) | |
Total Net revenues | 19,665 | (246 | ) | 19,419 | ||
The impact of adoption of IFRS 15 on the consolidated, Industrial Activities and Financial Services statement of cash flows for the nine months ended September 30, 2017 was immaterial.
Interim Report on Operations 11
Introduction
The operations, and key financial measures and financial analysis, differ significantly for manufacturing and distribution businesses and financial services businesses; therefore, for a better understanding of our operations and financial results, we present the following table providing the consolidated income statements and a breakdown of CNH Industrial results between Industrial Activities and Financial Services. Industrial Activities represent the activities carried out by the four industrial segments Agricultural Equipment, Construction Equipment, Commercial Vehicles, and Powertrain, as well as Corporate functions. The parent company, CNH Industrial N.V., is included under Industrial Activities as well as subsidiaries that provide centralized treasury services (i.e., raising funding in the market and financing Group subsidiaries). The activities of the treasury subsidiaries do not include the offer of financing to third parties.
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Consolidated Results of Operations(*)
Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | |||||||||||
($ million) | Consolidated | Industrial Activities | Financial Services | Consolidated | Industrial Activities | Financial Services | ||||||
Net revenues | 6,704 | 6,276 | 471 | 6,670 | 6,239 | 478 | ||||||
Cost of sales | 5,418 | 5,146 | 315 | 5,495 | 5,226 | 316 | ||||||
Selling, general and administrative costs | 527 | 488 | 39 | 535 | 492 | 43 | ||||||
Research and development costs | 278 | 278 | — | 265 | 265 | — | ||||||
Result from investments | 11 | 2 | 9 | 23 | 16 | 7 | ||||||
Gains/(losses) on disposal of investments | (1 | ) | (1 | ) | — | — | — | — | ||||
Restructuring costs | 7 | 7 | — | 53 | 53 | — | ||||||
Other income/(expenses) | (29 | ) | (28 | ) | (1 | ) | (34 | ) | (34 | ) | — | |
Financial income/(expenses)(1) | (199 | ) | (199 | ) | — | (191 | ) | (191 | ) | — | ||
PROFIT/(LOSS) BEFORE TAXES | 256 | 131 | 125 | 120 | (6 | ) | 126 | |||||
Income tax (expense) | (108 | ) | (78 | ) | (30 | ) | (73 | ) | (28 | ) | (45 | ) |
PROFIT/(LOSS) FOR THE PERIOD | 148 | 53 | 95 | 47 | (34 | ) | 81 | |||||
Result from intersegment investments(**) | — | 95 | — | — | 81 | — | ||||||
PROFIT/(LOSS) FOR THE PERIOD | 148 | 148 | 95 | 47 | 47 | 81 | ||||||
Notes:
(*) Transactions between Industrial Activities and Financial Services have been eliminated to arrive to the consolidated data.
(**) Investments held by subsidiaries belonging to one segment in subsidiaries included in the other segment are accounted for under the equity method and are classified in this item.
(1) | In the three months ended September 30, 2017, Financial income/(expenses) included a charge of $39 million related to the repurchase/early redemption of notes. |
Interim Report on Operations 12
Net revenues
We recorded net revenues of $6,704 million for the three months ended September 30, 2018, an increase of 0.5% (up 7.7% on a constant currency basis) compared to the three months ended September 30, 2017. Net revenues of Industrial Activities were $6,276 million in the three months ended September 30, 2018, an increase of 0.6% (up 7.8% on a constant currency basis) compared to the three months ended September 30, 2017, mainly as a result of a 17.5% and 5.3% increase in Construction Equipment and in Agricultural Equipment net revenues, respectively, offset by declines in Commercial Vehicles and Powertrain net revenues.
Cost of sales
Cost of sales were $5,418 million for the three months ended September 30, 2018 compared with $5,495 million for the three months ended September 30, 2017. As a percentage of net revenues of Industrial Activities, cost of sales was 82.0% in the three months ended September 30, 2018 (83.8% for the three months ended September 30, 2017).
Selling, general and administrative costs
Selling, general and administrative (“SG&A”) costs were $527 million during the three months ended September 30, 2018 (7.9% of net revenues) down $8 million compared to the three months ended September 30, 2017 (8.0% of net revenues).
Research and development costs
For the three months ended September 30, 2018, research and development (“R&D”) costs were $278 million ($265 million for the three months ended September 30, 2017) and included all R&D costs not recognized as assets amounting to $161 million ($148 million in the three months ended September 30, 2017) and the amortization of capitalized development costs of $117 million ($117 million in the three months ended September 30, 2017). During the period, CNH Industrial capitalized new development costs of $100 million ($101 million in the three months ended September 30, 2017). The costs in both periods were primarily attributable to spending on engine development costs associated with emission requirements and continued investment in new products.
Result from investments
Result from investments was a net gain of $11 million and $23 million for the three months ended September 30, 2018 and 2017, respectively.
Restructuring costs
Restructuring costs for the three months ended September 30, 2018 were $7 million compared to $53 million for the three months ended September 30, 2017. The costs in the three months ended September 30, 2018 were primarily related to actions as part of the Company’s Efficiency Program launched in 2014. During the three months ended September 30, 2017, the Company recognized a pre-tax restructuring charge related to capacity realignments in its firefighting business as part of the Efficiency Program totaling $47 million, of which $14 million was a non-cash charge.
Other income/(expenses)
Other expenses were $29 million for the three months ended September 30, 2018 compared to other expenses of $34 million in the three months ended September 30, 2017.
Financial income/(expenses)
Net financial expenses were $199 million for the three months ended September 30, 2018 compared to $191 million for the three months ended September 30, 2017. In the three months ended September 30, 2017, net financial expenses included a charge of $39 million related to the repurchase of portions of outstanding CNH Industrial Finance Europe S.A.’s 6.250% notes due 2018 and 2.750% notes due 2019. Excluding this charge, the increase was primarily attributable to foreign exchange impacts, partially offset by a decrease of interest expenses primarily attributable to refinancing and early retirement of certain high yield debt as well as lower average indebtedness.
Income tax (expense)
Three Months Ended September 30, | ||||||
($ million) | 2018 | 2017 | ||||
Profit before taxes | 256 | 120 | ||||
Income tax (expense) | (108 | ) | (73 | ) | ||
Effective tax rate | 42.2 | % | 60.8 | % | ||
Income tax expense for the three months ended September 30, 2018 was $108 million compared to $73 million for the three months ended September 30, 2017. The effective tax rates for the three months ended September 30, 2018 and 2017 were 42.2% and 60.8%, respectively. Excluding the impacts of restructuring in both periods, a tax adjustment in 2018 related to a valuation allowance established against certain deferred tax assets, the 2018 refinement to the 2017 impact of U.S. Tax Reform,
Interim Report on Operations 13
and the charge to repurchase the notes in 2017, the effective tax rates were 42% and 35% in the three months ended September 30, 2018 and 2017, respectively. The higher effective tax rate is attributable to increased pre-tax book losses not having a corresponding income tax benefit, partly offset by a lower U.S. tax rate.
U.S. Tax Reform changed many aspects of U.S. corporate income taxation, including, but not limited to, reducing the corporate tax rate from 35% to 21%, implementing a quasi-territorial tax system and imposing a tax on deemed repatriated earnings of certain foreign subsidiaries. At the end of 2017, CNH Industrial reasonably estimated the effects of U.S. Tax Reform. During the three months ended September 30, 2018, CNH Industrial recognized an immaterial net tax benefit in refining the provisional estimates of U.S. Tax Reform reflected in our 2017 results. During the final three months of 2018, CNH Industrial will finalize its provisional estimates of accounting for the impacts of U.S. Tax Reform.
Profit/(loss) for the period
Net profit was $148 million in the three months ended September 30, 2018 compared to net profit of $47 million in the three months ended September 30, 2017. In the three months ended September 30, 2017, net profit included a charge of $39 million related to the repurchase of notes, as well as $53 million of restructuring charges (compared to $7 million in the three months ended September 30, 2018).
Industrial Activities Performance
The following tables show net revenues, Adjusted EBIT and Adjusted EBITDA broken down by segment. We have also included a discussion of our results by Industrial Activities and each of our business segments.
Net revenues by segment
Three Months Ended September 30, | ||||||||
($ million) | 2018 | 2017 | % change | % change excl. FX | ||||
Agricultural Equipment | 2,681 | 2,547 | 5.3 | 14.6 | ||||
Construction Equipment | 726 | 618 | 17.5 | 21.2 | ||||
Commercial Vehicles | 2,395 | 2,573 | -6.9 | -0.4 | ||||
Powertrain | 961 | 1,075 | -10.6 | -4.0 | ||||
Eliminations and Other | (487 | ) | (574 | ) | — | — | ||
Total Net revenues of Industrial Activities | 6,276 | 6,239 | 0.6 | 7.8 | ||||
Financial Services | 471 | 478 | -1.5 | 5.9 | ||||
Eliminations and Other | (43 | ) | (47 | ) | — | — | ||
Total Net revenues | 6,704 | 6,670 | 0.5 | 7.7 | ||||
Adjusted EBIT by segment
Three Months Ended September 30, | ||||||
($ million) | 2018 | 2017 | Change | |||
Agricultural Equipment | 221 | 157 | 64 | |||
Construction Equipment | 21 | (5 | ) | 26 | ||
Commercial Vehicles | 71 | 49 | 22 | |||
Powertrain | 83 | 88 | -5 | |||
Unallocated items, eliminations and other | (59 | ) | (51 | ) | -8 | |
Total Adjusted EBIT of Industrial Activities | 337 | 238 | 99 | |||
Financial Services | 125 | 126 | -1 | |||
Eliminations and Other | — | — | — | |||
Total Adjusted EBIT | 462 | 364 | 98 | |||
Interim Report on Operations 14
Adjusted EBITDA by segment
Three Months Ended September 30, | ||||||
($ million) | 2018 | 2017 | Change | |||
Agricultural Equipment | 351 | 292 | 59 | |||
Construction Equipment | 48 | 24 | 24 | |||
Commercial Vehicles | 255 | 220 | 35 | |||
Powertrain | 124 | 132 | -8 | |||
Unallocated items, eliminations and other | (59 | ) | (51 | ) | -8 | |
Total Adjusted EBITDA of Industrial Activities | 719 | 617 | 102 | |||
Financial Services | 184 | 198 | -14 | |||
Eliminations and Other | — | — | — | |||
Total Adjusted EBITDA | 903 | 815 | 88 | |||
Net revenues of Industrial Activities were $6,276 million during the three months ended September 30, 2018, a 0.6% increase (up 7.8% on a constant currency basis) compared to the same period of 2017, with a 17.5% increase in Construction Equipment and a 5.3% increase in Agricultural Equipment, offset by declines in Commercial Vehicles and Powertrain.
Adjusted EBIT of Industrial Activities was $337 million in the three months ended September 30, 2018, an increase of $99 million (or up 41.6%) from the three months ended September 30, 2017, with an Adjusted EBIT margin increased 1.6 percentage points (“p.p.”) to 5.4% compared to the three months ended September 30, 2017.
Adjusted EBITDA of Industrial Activities was up 16.5% to $719 million for the three months ended September 30, 2018 compared to $617 million for the three months ended September 30, 2017, with an Adjusted EBITDA margin of 11.5%, up 1.6 p.p. compared to the three months ended September 30, 2017, as a result of improvements in operating profitability.
Interim Report on Operations 15
The following tables summarize the reconciliation of Adjusted EBIT and Adjusted EBITDA, non-GAAP financial measures, to consolidated profit/(loss), the most comparable EU-IFRS financial measure, for the three months ended September 30, 2018 and 2017.
Three Months Ended September 30, 2018 | ||||||||||||||||
($ million) | Agricultural Equipment | Construction Equipment | Commercial Vehicles | Powertrain | Unallocated items, elimination and other | Total Industrial Activities | Financial Services | Total | ||||||||
Profit/(loss)(1) | 53 | 95 | 148 | |||||||||||||
Add back | ||||||||||||||||
Financial expenses | 199 | — | 199 | |||||||||||||
Income tax expense | 78 | 30 | 108 | |||||||||||||
Adjustments: | ||||||||||||||||
Restructuring costs | 3 | — | 4 | — | — | 7 | — | 7 | ||||||||
Pre-tax gain related to the modification of a healthcare plan in the U.S. | — | — | — | — | — | — | — | |||||||||
Adjusted EBIT | 221 | 21 | 71 | 83 | (59 | ) | 337 | 125 | 462 | |||||||
Depreciation and amortization | 129 | 27 | 89 | 41 | — | 286 | — | 286 | ||||||||
Depreciation of assets under operating leases and assets sold with buy-back commitments | 1 | — | 95 | — | — | 96 | 59 | 155 | ||||||||
Adjusted EBITDA | 351 | 48 | 255 | 124 | (59 | ) | 719 | 184 | 903 | |||||||
(1) | For Industrial Activities, net income (loss) net of “Results from intersegment investments”. |
Three Months Ended September 30, 2017 | ||||||||||||||||
($ million) | Agricultural Equipment | Construction Equipment | Commercial Vehicles | Powertrain | Unallocated items, elimination and other | Total Industrial Activities | Financial Services | Total | ||||||||
Profit/(loss)(1) | (34 | ) | 81 | 47 | ||||||||||||
Add back | ||||||||||||||||
Financial expenses | 191 | — | 191 | |||||||||||||
Income tax expense | 28 | 45 | 73 | |||||||||||||
Adjustments: | ||||||||||||||||
Restructuring costs | 2 | — | 51 | — | — | 53 | — | 53 | ||||||||
Adjusted EBIT | 157 | (5 | ) | 49 | 88 | (51 | ) | 238 | 126 | 364 | ||||||
Depreciation and amortization | 135 | 29 | 91 | 44 | — | 299 | 1 | 300 | ||||||||
Depreciation of assets under operating leases and assets sold with buy-back commitments | — | — | 80 | — | — | 80 | 71 | 151 | ||||||||
Adjusted EBITDA | 292 | 24 | 220 | 132 | (51 | ) | 617 | 198 | 815 | |||||||
(1) | For Industrial Activities, net income (loss) net of “Results from intersegment investments”. |
Interim Report on Operations 16
Agricultural Equipment
Net revenues
The following table shows Agricultural Equipment net revenues broken down by geographic region for the three months ended September 30, 2018 compared to the three months ended September 30, 2017:
Agricultural Equipment Net revenues – by geographic region:
Three Months Ended September 30, | ||||||
($ million) | 2018 | 2017 | % Change | |||
NAFTA | 945 | 824 | 14.7 | |||
EMEA | 894 | 862 | 3.7 | |||
LATAM | 446 | 410 | 8.8 | |||
APAC | 396 | 451 | -12.2 | |||
Total | 2,681 | 2,547 | 5.3 | |||
Net revenues of Agricultural Equipment were $2,681 million for the three months ended September 30, 2018, an increase of 5.3% (up 14.6% on a constant currency basis) compared to the three months ended September 30, 2017, primarily due to price realization across all regions and higher sales volumes in NAFTA, partially offset by a revenue decline in APAC, primarily Australia.
For the three months ended September 30, 2018, worldwide industry unit sales were down 6% compared to the three months ended September 30, 2017. In NAFTA, industry volumes in the over 140 horsepower (“hp”) tractor market sector were up 34% and combines were up 9%. Industry volumes for under 140 hp tractors in NAFTA were also up 7%. EMEA markets were down 3% and 17% for tractors and combines, respectively. In LATAM, the tractor market increased 5% and the combine market increased 24%. APAC markets decreased 11% and 1% for tractors and combines, respectively.
Adjusted EBIT
Adjusted EBIT was $221 million in the three months ended September 30, 2018 ($157 million in the three months ended September 30, 2017). Adjusted EBIT margin increased 2.0 p.p. to 8.2% compared to the three months ended September 30, 2017. The increase was mainly attributable to favorable net price realization, while the anticipated raw material cost increase was offset by manufacturing efficiencies and lower warranty cost due to improved quality performance.
Construction Equipment
Net revenues
The following table shows Construction Equipment net revenues broken down by geographic region for the three months ended September 30, 2018 compared to the three months ended September 30, 2017:
Construction Equipment Net revenues – by geographic region:
Three Months Ended September 30, | ||||||
($ million) | 2018 | 2017 | % change | |||
NAFTA | 388 | 319 | 21.6 | |||
EMEA | 130 | 127 | 2.4 | |||
LATAM | 83 | 86 | -3.5 | |||
APAC | 125 | 86 | 45.3 | |||
Total | 726 | 618 | 17.5 | |||
Net revenues of Construction Equipment were $726 million for the three months ended September 30, 2018, an increase of 17.5% compared to the three months ended September 30, 2017 (up 21.2% on a constant currency basis), as a result of positive net price realization and favorable end-user demand, primarily in NAFTA and APAC.
During the three months ended September 30, 2018, Construction Equipment’s worldwide heavy equipment and worldwide light equipment industry sales were up 13% and 17%, respectively, compared to the three months ended September 30, 2017.
Interim Report on Operations 17
Adjusted EBIT
Adjusted EBIT was $21 million for the three months ended September 30, 2018 (negative Adjusted EBIT of $5 million in the three months ended September 30, 2017). Adjusted EBIT margin increased 3.7 p.p. to 2.9% compared to the three months ended September 30, 2017. Results were favorably impacted by higher volume, favorable product mix, and net price realization, more than offsetting raw material cost increases. During the three months ended September 30, 2018 production levels were 13% above retail demand, in anticipation of the fourth quarter retail selling season.
Commercial Vehicles
Net revenues
The following table shows Commercial Vehicles’ net revenues broken down by geographic region for the three months ended September 30, 2018 compared to the three months ended September 30, 2017:
Commercial Vehicles Net revenues – by geographic region:
Three Months Ended September 30, | ||||||
($ million) | 2018 | 2017 | % change | |||
NAFTA | 3 | 4 | n.m. | |||
EMEA | 2,054 | 2,079 | -1.2 | |||
LATAM | 158 | 235 | -32.8 | |||
APAC | 180 | 255 | -29.4 | |||
Total | 2,395 | 2,573 | -6.9 | |||
n.m. - not meaningful.
Commercial Vehicles’ net revenues were $2,395 million for the three months ended September 30, 2018, a decline of 6.9% (down 0.4% on a constant currency basis) compared to the three months ended September 30, 2017, as a result of lower sales volume primarily in heavy vehicle trucks in EMEA, partially offset by favorable pricing across all regions. Total deliveries were down 8% year-over-year, as increased volumes in light commercial vehicles and in buses (as a result of increased end-user demand in EMEA and Brazil) were more than offset by the impact of lower EMEA volumes in heavy vehicles. The decline in heavy vehicle sales is attributable to a strategy shift, which focuses sales on a more profitable product portfolio, including alternative propulsion vehicles.
During the three months ended September 30, 2018, the European truck market (GVW ≥3.5 tons), excluding U.K. and Ireland, increased 7% compared to the same period in 2017. In Europe, the Light Commercial Vehicles (“LCV”) market (GVW 3.5-7.49 tons) increased 6% and the Medium & Heavy (“M&H”) truck market (GVW ≥7.5 tons) increased 8%. In LATAM, new truck registrations (GVW ≥3.5 tons) increased 23% over the same period of 2017 with an increase of 51% in Brazil, partially offset by a decrease of 31% in Argentina. In APAC, new truck registrations decreased by 2%.
In the three months ended September 30, 2018, Commercial Vehicles’ estimated market share in the European truck market (GVW ≥3.5 tons), excluding U.K. and Ireland, was 11.4%, down 1.4 p.p. compared to the three months ended September 30, 2017. Commercial Vehicles’ market share in LATAM in the three months ended September 30, 2018 was 8.7%, down 3.4 p.p. compared to the three months ended September 30, 2017.
Commercial Vehicles delivered approximately 31,000 vehicles (including buses and specialty vehicles) in the three months ended September 30, 2018, representing an 8% decrease from the same prior-year period. Volumes were down 2% and 21% in LCV and M&H truck segments, respectively. Commercial Vehicles’ deliveries decreased 5%, 17% and 27% in EMEA, LATAM and APAC, respectively.
In the three months ended September 30, 2018, Commercial Vehicles’ ratio of orders received to units shipped and billed, or book-to-bill ratio, for the European truck market was 0.94. In the three months ended September 30, 2018, truck order intake in Europe decreased 9% compared to the three months ended September 30, 2017, with a 37% decrease in M&H, partially offset by a 5% increase in LCV.
Adjusted EBIT
Adjusted EBIT was $71 million for the three months ended September 30, 2018 ($49 million in the three months ended September 30, 2017). Adjusted EBIT margin increased 1.1 p.p. to 3.0% compared to the three months ended September 30, 2017. The increase was mainly the result of favorable product mix and positive net price realization, primarily in the truck product line-up.
Interim Report on Operations 18
Powertrain
Net revenues
Powertrain net revenues were $961 million for the three months ended September 30, 2018, a 10.6% decrease compared to the three months ended September 30, 2017 (down 4.0% on a constant currency basis), due to lower sales volume, primarily attributable to a different calendarization of the engine sales associated with the transition to the new Stage V regulation. Sales to external customers accounted for 52% of total net revenues (48% in the three months ended September 30, 2017).
During the three months ended September 30, 2018, Powertrain sold approximately 134,600 engines, a decrease of 9% compared to the three months ended September 30, 2017. In terms of major customers, 24% of engine units were supplied to Commercial Vehicles, 15% to Agricultural Equipment, 5% to Construction Equipment and the remaining 56% to external customers. Additionally, Powertrain delivered approximately 15,400 transmissions, a decrease of 3% compared to the three months ended September 30, 2017, and approximately 35,000 axles, a decrease of 16% compared to the three months ended September 30, 2017.
Adjusted EBIT
Adjusted EBIT was $83 million for the three months ended September 30, 2018 ($88 million in the three months ended September 30, 2017). Adjusted EBIT margin slightly increased 0.4 p.p. to 8.6% compared to the three months ended September 30, 2017, as favorable product mix more than offset a 9% decline in engine volumes and higher product development spending.
Financial Services Performance
Net revenues
Financial Services reported net revenues of $471 million for the three months ended September 30, 2018, a 1.5% decrease compared to the three months ended September 30, 2017 (up 5.9% on a constant currency basis), primarily due to a lower average portfolio balance in NAFTA, partially offset by growth in other regions.
Net income
Net income of Financial Services was $95 million for the three months ended September 30, 2018, a $14 million increase over the three months ended September 30, 2017.
Retail loan originations in the three months ended September 30, 2018, including unconsolidated joint ventures, were $2.4 billion, relatively flat compared to the three months ended September 30, 2017. The managed portfolio, including unconsolidated joint ventures, was $25.5 billion as of September 30, 2018 (of which retail was 63% and wholesale was 37%), down $0.5 billion compared to September 30, 2017. Excluding the impact of currency translation, the managed portfolio increased $0.4 billion compared to the same period in 2017.
Interim Report on Operations 19
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Consolidated Results of Operations(*)
Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | |||||||||||
($ million) | Consolidated | Industrial Activities | Financial Services | Consolidated | Industrial Activities | Financial Services | ||||||
Net revenues | 21,487 | 20,156 | 1,471 | 19,419 | 18,055 | 1,492 | ||||||
Cost of sales | 17,416 | 16,598 | 958 | 15,972 | 15,098 | 1,002 | ||||||
Selling, general and administrative costs | 1,685 | 1,562 | 123 | 1,609 | 1,484 | 125 | ||||||
Research and development costs | 804 | 804 | — | 760 | 760 | — | ||||||
Result from investments | 55 | 29 | 26 | 71 | 51 | 20 | ||||||
Gains/(losses) on disposal of investments | (1 | ) | (1 | ) | — | — | — | — | ||||
Restructuring costs | 17 | 17 | — | 76 | 74 | 2 | ||||||
Other income/(expenses)(1) | 425 | 429 | (4 | ) | (66 | ) | (62 | ) | (4 | ) | ||
Financial income/(expenses)(2) | (505 | ) | (505 | ) | — | (483 | ) | (483 | ) | — | ||
PROFIT/(LOSS) BEFORE TAXES | 1,539 | 1,127 | 412 | 524 | 145 | 379 | ||||||
Income tax (expense) | (422 | ) | (312 | ) | (110 | ) | (234 | ) | (112 | ) | (122 | ) |
PROFIT/(LOSS) FOR THE PERIOD | 1,117 | 815 | 302 | 290 | 33 | 257 | ||||||
Result from intersegment investments(**) | — | 302 | — | — | 257 | — | ||||||
PROFIT/(LOSS) FOR THE PERIOD | 1,117 | 1,117 | 302 | 290 | 290 | 257 | ||||||
Notes:
(*) Transactions between Industrial Activities and Financial Services have been eliminated to arrive to the consolidated data.
(**) | Investments held by subsidiaries belonging to one segment in subsidiaries included in the other segment are accounted for under the equity method and are classified in this item. |
(1) | In the nine months ended September 30, 2018, Other income/(expenses) includes a pre-tax gain of $527 million related to the modification of a healthcare plan in the U.S. |
(2) | In the nine months ended September 30, 2017, Financial income/(expenses) included the charge of $56 million related to the repurchase/early redemption of notes. |
Interim Report on Operations 20
Net revenues
We recorded net revenues of $21,487 million for the nine months ended September 30, 2018, an increase of 10.6% (up 9.7% on a constant currency basis) compared to the nine months ended September 30, 2017. Net revenues of Industrial Activities were $20,156 million in the nine months ended September 30, 2018, an increase of 11.6% (up 10.4% on a constant currency basis) compared to the nine months ended September 30, 2017 as a result of increased volumes in all Industrial Activities segments.
Cost of sales
Cost of sales were $17,416 million for the nine months ended September 30, 2018 compared with $15,972 million for the nine months ended September 30, 2017. The increase of 9.0% was driven by the increase in net revenues. As a percentage of net revenues of Industrial Activities, cost of sales was 82.3% in the nine months ended September 30, 2018 (83.6% for the nine months ended September 30, 2017).
Selling, general and administrative costs
SG&A costs were $1,685 million during the nine months ended September 30, 2018 (7.8% of net revenues) up $76 million compared to the nine months ended September 30, 2017 (8.3% of net revenues).
Research and development costs
For the nine months ended September 30, 2018, R&D costs were $804 million ($760 million in the nine months ended September 30, 2017) and included all R&D costs not recognized as assets amounting to $445 million ($409 million in the nine months ended September 30, 2017) and the amortization of capitalized development costs of $359 million ($351 million in the nine months ended September 30, 2017). During the period, CNH Industrial capitalized new development costs of $321 million ($271 million in the nine months ended September 30, 2017). The costs in both periods were primarily attributable to spending on engine development costs associated with emission requirements and continued investment in new products.
Result from investments
Result from investments was a net gain of $55 million and $71 million for the nine months ended September 30, 2018 and 2017, respectively.
Restructuring costs
Restructuring costs for the nine months ended September 30, 2018 were $17 million compared to $76 million for the nine months ended September 30, 2017. The costs in the nine months ended September 30, 2018 were primarily attributable to actions in Commercial Vehicles as part of the Company’s Efficiency Program launched in 2014. The costs in the nine months ended September 30, 2017 were primarily attributable to actions within Agricultural Equipment, Commercial Vehicles and Construction Equipment as part of the Company’s Efficiency Program.
Other income/(expenses)
Other income was $425 million for the nine months ended September 30, 2018 compared to other expenses of $66 million in the nine months ended September 30, 2017. In the nine months ended September 30, 2018, other income included a pre-tax gain of $527 million related to the modification of a healthcare plan (the “Benefits Modification gain”) following the favorable judgement issued by the United States Supreme Court, as previously announced by CNH Industrial on April 16, 2018.
Financial income/(expenses)
Net financial expenses were $505 million for the nine months ended September 30, 2018 compared to $483 million for the nine months ended September 30, 2017. In the nine months ended September 30, 2017, net financial expenses included the charge of $56 million related to the repurchase/early redemption of notes. Excluding this charge, the increase was primarily attributable to foreign exchange impacts, partially offset by a decrease of interest expenses primarily attributable to refinancing and early retirement of certain high yield debt as well as lower average indebtedness.
Income tax (expense)
Nine Months Ended September 30, | ||||||
($ million) | 2018 | 2017 | ||||
Profit before taxes | 1,539 | 524 | ||||
Income tax (expense) | (422 | ) | (234 | ) | ||
Effective tax rate | 27.4 | % | 44.7 | % | ||
Income tax expense for the nine months ended September 30, 2018 was $422 million compared to $234 million in the nine months ended September 30, 2017. The effective tax rates for the nine months ended September 30, 2018 and 2017 were 27.4% and 44.7%, respectively. Excluding the impacts of restructuring in both periods, the Benefits Modification gain in 2018, a tax adjustment in 2018 related to a valuation allowance established against certain deferred tax assets, the 2018 refinement
Interim Report on Operations 21
to the 2017 impact of U.S. Tax Reform, and the charge to repurchase/early redeem the notes in 2017, the effective tax rates were 29% and 38% in the nine months ended September 30, 2018 and 2017, respectively. The lower effective tax rate in the current period is primarily attributable to a favorable geographic mix of pre-tax earnings, including improved pre-tax results in jurisdictions where CNH Industrial was unable to benefit from pre-tax losses, as well as a lower U.S. tax rate.
U.S. Tax Reform changed many aspects of U.S. corporate income taxation, including, but not limited to, reducing the corporate tax rate from 35% to 21%, implementing a quasi-territorial tax system and imposing a tax on deemed repatriated earnings of certain foreign subsidiaries. At the end of 2017, CNH Industrial reasonably estimated the effects of U.S. Tax Reform. During the nine months ended September 30, 2018, CNH Industrial recognized an immaterial net tax benefit in refining the provisional estimates of U.S. Tax Reform reflected in our 2017 results. During the final three months of 2018, CNH Industrial will finalize its provisional estimates of accounting for the impacts of U.S. Tax Reform.
Profit/(loss) for the period
Net profit was $1,117 million in the nine months ended September 30, 2018 compared to net profit of $290 million in the nine months ended September 30, 2017, and included the after-tax gain of $399 million related to the Benefits Modification gain previously mentioned.
Industrial Activities Performance
The following tables show net revenues, Adjusted EBIT and Adjusted EBITDA broken down by segment. We have also included a discussion of our results by Industrial Activities and each of our business segments.
Net revenues by segment
Nine Months Ended September 30, | |||||||
($ million) | 2018 | 2017 | % change | % change excl. FX | |||
Agricultural Equipment | 8,572 | 7,553 | 13.5 | 14.8 | |||
Construction Equipment | 2,207 | 1,770 | 24.7 | 24.6 | |||
Commercial Vehicles | 7,779 | 7,296 | 6.6 | 3.3 | |||
Powertrain | 3,366 | 3,213 | 4.8 | 0.8 | |||
Eliminations and Other | (1,768 | ) | (1,777 | ) | — | — | |
Total Net revenues of Industrial Activities | 20,156 | 18,055 | 11.6 | 10.4 | |||
Financial Services | 1,471 | 1,492 | -1.4 | 0.5 | |||
Eliminations and Other | (140 | ) | (128 | ) | — | — | |
Total Net revenues | 21,487 | 19,419 | 10.6 | 9.7 | |||
Adjusted EBIT by segment
Nine Months Ended September 30, | ||||||
($ million) | 2018 | 2017 | Change | |||
Agricultural Equipment | 776 | 503 | 273 | |||
Construction Equipment | 41 | (48 | ) | 89 | ||
Commercial Vehicles | 214 | 122 | 92 | |||
Powertrain | 281 | 251 | 30 | |||
Unallocated items, eliminations and other | (190 | ) | (126 | ) | -64 | |
Total Adjusted EBIT of Industrial Activities | 1,122 | 702 | 420 | |||
Financial Services | 412 | 381 | 31 | |||
Eliminations and Other | — | — | — | |||
Total Adjusted EBIT | 1,534 | 1,083 | 451 | |||
Interim Report on Operations 22
Adjusted EBITDA by segment
Nine Months Ended September 30, | ||||||
($ million) | 2018 | 2017 | Change | |||
Agricultural Equipment | 1,183 | 905 | 278 | |||
Construction Equipment | 123 | 41 | 82 | |||
Commercial Vehicles | 775 | 619 | 156 | |||
Powertrain | 412 | 376 | 36 | |||
Unallocated items, eliminations and other | (189 | ) | (126 | ) | -63 | |
Total Adjusted EBITDA of Industrial Activities | 2,304 | 1,815 | 489 | |||
Financial Services | 600 | 584 | 16 | |||
Eliminations and Other | — | — | — | |||
Total Adjusted EBITDA | 2,904 | 2,399 | 505 | |||
Net revenues of Industrial Activities were $20,156 million during the nine months ended September 30, 2018, an increase of 11.6% (up 10.4% on a constant currency basis) compared to the same period of 2017, driven by increased net revenues in each Industrial Activities segment.
Adjusted EBIT of Industrial Activities was $1,122 million in the nine months ended September 30, 2018, a $420 million increase over the nine months ended September 30, 2017, with an Adjusted EBIT margin of 5.6%, up 1.7 p.p. compared to the nine months ended September 30, 2017.
Adjusted EBITDA of Industrial Activities was up 26.9% to $2,304 million for the nine months ended September 30, 2018 compared to $1,815 million for the nine months ended September 30, 2017, with an Adjusted EBITDA margin of 11.4%, up 1.3 p.p. compared to the nine months ended September 30, 2017.
Interim Report on Operations 23
The following tables summarize the reconciliation of Adjusted EBIT and Adjusted EBITDA, non-GAAP financial measures, to consolidated profit/(loss), the most comparable EU-IFRS financial measure, for the nine months ended September 30, 2018 and 2017.
Nine Months Ended September 30, 2018 | ||||||||||||||||
($ million) | Agricultural Equipment | Construction Equipment | Commercial Vehicles | Powertrain | Unallocated items, elimination and other | Total Industrial Activities | Financial Services | Total | ||||||||
Profit/(loss)(1) | 815 | 302 | 1,117 | |||||||||||||
Add back | ||||||||||||||||
Financial expenses | 505 | — | 505 | |||||||||||||
Income tax expense | 312 | 110 | 422 | |||||||||||||
Adjustments: | ||||||||||||||||
Restructuring costs | 4 | — | 12 | 1 | — | 17 | — | 17 | ||||||||
Pre-tax gain related to the modification of a healthcare plan in the U.S. | — | — | — | — | (527 | ) | (527 | ) | — | (527 | ) | |||||
Adjusted EBIT | 776 | 41 | 214 | 281 | (190 | ) | 1,122 | 412 | 1,534 | |||||||
Depreciation and amortization | 405 | 82 | 270 | 131 | 1 | 889 | 3 | 892 | ||||||||
Depreciation of assets under operating leases and assets sold with buy-back commitments | 2 | — | 291 | — | — | 293 | 185 | 478 | ||||||||
Adjusted EBITDA | 1,183 | 123 | 775 | 412 | (189 | ) | 2,304 | 600 | 2,904 | |||||||
(1) | For Industrial Activities, net income (loss) net of “Results from intersegment investments”. |
Nine Months Ended September 30, 2017 | ||||||||||||||||
($ million) | Agricultural Equipment | Construction Equipment | Commercial Vehicles | Powertrain | Unallocated items, elimination and other | Total Industrial Activities | Financial Services | Total | ||||||||
Profit/(loss)(1) | 33 | 257 | 290 | |||||||||||||
Add back | ||||||||||||||||
Financial expenses | 483 | — | 483 | |||||||||||||
Income tax expense | 112 | 122 | 234 | |||||||||||||
Adjustments: | ||||||||||||||||
Restructuring costs | 12 | 3 | 58 | 1 | — | 74 | 2 | 76 | ||||||||
Adjusted EBIT | 503 | (48 | ) | 122 | 251 | (126 | ) | 702 | 381 | 1,083 | ||||||
Depreciation and amortization | 402 | 89 | 265 | 125 | — | 881 | 4 | 885 | ||||||||
Depreciation of assets under operating leases and assets sold with buy-back commitments | — | — | 232 | — | — | 232 | 199 | 431 | ||||||||
Adjusted EBITDA | 905 | 41 | 619 | 376 | (126 | ) | 1,815 | 584 | 2,399 | |||||||
(1) | For Industrial Activities, net income (loss) net of “Results from intersegment investments”. |
Interim Report on Operations 24
Agricultural Equipment
Net revenues
The following table shows Agricultural Equipment net revenues broken down by geographic region for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017:
Agricultural Equipment Net revenues – by geographic region:
Nine Months Ended September 30, | |||||
($ million) | 2018 | 2017 | % change | ||
NAFTA | 2,793 | 2,434 | 14.7 | ||
EMEA | 3,291 | 2,784 | 18.2 | ||
LATAM | 1,155 | 1,125 | 2.7 | ||
APAC | 1,333 | 1,210 | 10.2 | ||
Total | 8,572 | 7,553 | 13.5 | ||
Net revenues of Agricultural Equipment were $8,572 million for the nine months ended September 30, 2018, an increase of 13.5% (up 14.8% on a constant currency basis) compared to the nine months ended September 30, 2017, primarily due to higher sales volumes and positive net price realization.
For the nine months ended September 30, 2018, worldwide industry unit sales increased 3% compared to the prior period. In NAFTA, industry volumes in the over 140 hp tractor market sector were up 13% and combines were up 12%. Industry volumes for under 140 hp tractors in NAFTA were up 6%. EMEA markets were down 3% for tractors and up 6% for combines. In LATAM, the tractor markets decreased 3% and the combine markets increased 8%. APAC markets increased 4% for tractors and decreased 2% for combines.
Adjusted EBIT
Adjusted EBIT was $776 million for the nine months ended September 30, 2018 ($503 million for the nine months ended September 30, 2017). Adjusted EBIT margin increased 2.4 p.p. to 9.1% compared to the nine months ended September 30, 2017. The increase was due to favorable volume, better mix and positive net price realization. The Company continues to invest in its product development program for precision farming and compliance with Stage V emissions requirements.
Construction Equipment
Net revenues
The following table shows Construction Equipment net revenues broken down by geographic region for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017:
Construction Equipment Net revenues – by geographic region:
Nine Months Ended September 30, | |||||
($ million) | 2018 | 2017 | % change | ||
NAFTA | 1,113 | 932 | 19.4 | ||
EMEA | 439 | 354 | 24.0 | ||
LATAM | 252 | 209 | 20.6 | ||
APAC | 403 | 275 | 46.5 | ||
Total | 2,207 | 1,770 | 24.7 | ||
Net revenues of Construction Equipment were $2,207 million for the nine months ended September 30, 2018, an increase of 24.7% from the nine months ended September 30, 2017 (up 24.6% on a constant currency basis), as a result of a favorable end-user industry demand environment and positive net price realization.
During the nine months ended September 30, 2018, Construction Equipment’s worldwide heavy equipment and worldwide light equipment industry sales were up 25% and 18%, respectively, compared to the nine months ended September 30, 2017.
Interim Report on Operations 25
Adjusted EBIT
Adjusted EBIT was $41 million for the nine months ended September 30, 2018 (negative Adjusted EBIT of $48 million for the nine months ended September 30, 2017). Adjusted EBIT margin increased 4.6 p.p. to 1.9% compared to the nine months ended September 30, 2017. Results were favorably impacted by higher sales volume, favorable product mix and positive net price realization, more than offsetting raw material cost increases.
Commercial Vehicles
Net revenues
The following table shows Commercial Vehicles’ net revenues broken down by geographic region for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017:
Commercial Vehicles Net revenues – by geographic region:
Nine Months Ended September 30, | ||||||
($ million) | 2018 | 2017 | % change | |||
NAFTA | 9 | 13 | n.m. | |||
EMEA | 6,637 | 6,002 | 10.6 | |||
LATAM | 546 | 599 | -8.8 | |||
APAC | 587 | 682 | -13.9 | |||
Total | 7,779 | 7,296 | 6.6 | |||
n.m. - not meaningful.
Commercial Vehicles’ net revenues were $7,779 million for the nine months ended September 30, 2018, an increase of 6.6% (up 3.3% on a constant currency basis) over the nine months ended September 30, 2017, primarily as a result of favorable product mix and positive price realization.
During the nine months ended September 30, 2018, the European truck market (GVW ≥3.5 tons), excluding U.K. and Ireland, was up 9% compared to the same period in 2017. In Europe, the LCV market (GVW 3.5-7.49 tons) increased 10% and the M&H truck market (GVW ≥7.5 tons) increased 6%. In LATAM, new truck registrations (GVW ≥3.5 tons) increased 27% over the same period of 2017 with an increase of 46% in Brazil, partially offset by a decrease of 8% in Argentina. In APAC, new truck registrations grew by 5%.
In the nine months ended September 30, 2018, Commercial Vehicles’ estimated market share in the European truck market (GVW ≥3.5 tons), excluding U.K. and Ireland, was 11.8%, down 0.8 p.p. compared to the nine months ended September 30, 2017. Commercial Vehicles’ market share in LATAM in the nine months ended September 30, 2018 was 9.9%, down 2.1 p.p. compared to the nine months ended September 30, 2017.
Commercial Vehicles delivered approximately 104,600 vehicles (including buses and specialty vehicles) in the nine months ended September 30, 2018, representing a 2% decrease over the same prior-year period. Volumes were up 5% in LCV and down 16% in M&H truck segments. Commercial Vehicles’ deliveries decreased 2% in EMEA, were flat in LATAM and decreased 6% in APAC.
Adjusted EBIT
Adjusted EBIT was $214 million for the nine months ended September 30, 2018 ($122 million in the nine months ended September 30, 2017). Adjusted EBIT margin increased 1.1 p.p. to 2.8% compared to the nine months ended September 30, 2017. The increase was mainly due to favorable product mix and net positive price realization.
Powertrain
Net revenues
Powertrain net revenues were $3,366 million for the nine months ended September 30, 2018, a