CNH Industrial N.V. (CNH) FY 2023 MD&A

Management's Discussion and Analysis

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the Company's financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, the consolidated financial statements and the accompanying Notes to the Consolidated Financial Statements.

This discussion includes forward-looking statements, which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those expressed or implied by the forward-looking statements. This MD&A should be read in conjunction with our discussion of cautionary statements and significant risks to the Company’s business under “Item 1A. Risk Factors” of this Annual Report on Form 10-K.

Overview

CNH is a leading equipment and services company engaged in the design, production, marketing, sale, and financing of agricultural and construction equipment.

Until December 31, 2021, CNH Industrial N.V. owned and controlled the Commercial and Specialty Vehicles business, the Powertrain business, and the related Financial Services business (together the “Iveco Group Business” or the “On-Highway Business”), as well as the Agriculture business, the Construction business, and the related Financial Services business (collectively, the “Off-Highway Business”). Effective January 1, 2022, the Iveco Group Business was separated from CNH Industrial N.V. by way of a demerger under Dutch law (the "Demerger") to Iveco Group N.V. (the "Iveco Group") and the Iveco Group became a public listed company independent from CNH, with its common shares trading on Euronext Milan. The On-Highway Business' financial results for the periods prior to the Demerger have been reflected in our Consolidated Statement of Operations, retrospectively, as discontinued operations. Additionally, the related assets and liabilities associated with the On-Highway Business in the prior year consolidated balance sheet are classified as discontinued operations within Assets Held for Distribution and Liabilities Held for Distribution on the Consolidated Balance Sheet.

We generate revenues and cash flows principally from the sale of equipment to dealers and distributors. Financial Services provides a range of financial products focused on financing the sale and lease of equipment to our dealers and their customers.

Revenues of Industrial Activities are presented net of discounts, allowances, settlement discounts and rebates, as well as costs for sales incentive programs, determined on the basis of historical costs, country by country, and charged against profit for the period in which the corresponding sales are recognized. Our sales incentive programs may include the granting by Financial Services of retail financing at discounts to market interest rates. The corresponding cost to Industrial Activities is recognized at the time of the initial sale and the revenues of Financial Services are recognized on a pro rata basis in order to match the cost of funding.

Principal Factors Affecting Results

Our operating performance is highly correlated to sales volumes, which are influenced by several different factors that vary across our segments.

For Agriculture, the key factors influencing sales are the level of net farm income, which is influenced by commodity prices, and, to a lesser extent, general economic conditions, interest rates and the availability of financing and related subsidy programs. Variations by region and product are also attributable to differences in typical climate and farming calendars, as well as extraordinary weather conditions.

For Construction, segmentation varies by regional market: in developed markets, demand is oriented toward more sophisticated machines that increase operator productivity, while in developing markets, demand is oriented toward more utilitarian models with greater perceived durability. Sales levels for heavy construction equipment are particularly dependent on the expected level of major infrastructure construction and repair projects, which is a function of expected economic growth and government spending. For light construction equipment, the principal factor influencing demand is the level of residential and commercial construction, remodeling and renovation, which is influenced in turn by interest rates and availability of financing, as well as, in the residential sector, levels of disposable income and, in the commercial sector, the broader economic cycle.

Demand for services and service-related products, including parts, is a function of the nature and extent of the use of the related agricultural and construction equipment. The after-sales market is historically less volatile than the wholegoods market and, therefore, helps reduce the impact on operating results of fluctuations in new sales.

Our cost base principally comprises the cost of raw materials and personnel costs.

Raw material costs are closely linked to commodity markets and largely outside of our control, although we are making a targeted effort to increase procurement and production efficiencies. Historically, we have been able to pass on to our customers most of the increase in the cost of raw materials through increases in product pricing. Nevertheless, even when we are able to do so, there is

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usually a time lag between an increase in materials cost and a realized increase in product prices and, accordingly, our results are typically adversely affected at least in the short-term until price increases are accepted in the market.

Personnel costs change over time and are impacted by the terms of collective bargaining agreements, inflation and average number of employees. A significant proportion of our employees are based in countries where labor laws impose significant protection of employers’ rights and, accordingly, we have limited ability to downsize our personnel in response to a decrease in production during periods of market downturn.

Our results are also affected by changes in foreign exchange rates from period to period, mainly due to the difference in geographic distribution between our manufacturing activities and our commercial activities, resulting in cash flows from exports denominated in currencies that differ from those associated with production costs. In addition, our Consolidated Financial Statements are expressed in U.S. dollars and are therefore subject to movements in exchange rates upon translation of the financial statements of subsidiaries whose functional currency is not the U.S. dollar.

Finally, our results may be materially affected, directly or indirectly, by governmental policies, including monetary and fiscal policies and policies on international trade and investment.

Global Business Conditions

In combination with the economic recovery factors and repercussions from geopolitical events, the global economy continues to experience volatile disruptions including to the commodity, labor and transportation markets. These disruptions have contributed to an inflationary environment which has affected, and may continue to affect, the price and availability of certain products and services necessary for the Company's operations. For example, the Company experienced supply chain disruptions and inflationary pressures in 2022 and, while these trends improved in 2023, the Company continues to experience some disruptions. The reduction in supply chain disruptions contributed to improved efficiencies in our manufacturing operations, but purchasing costs remain elevated.

In addition, the Company continues to monitor global economic conditions and the impact of macroeconomic pressures, including repercussions from rising interest rates, fluctuating currency exchange rates, inflation and recession fears, on the Company’s business, customers and suppliers.

For a discussion of the Company’s risks and uncertainties, see Part 1, Item 1A: Risk Factors.

Non-GAAP Financial Measures

CNH monitors its operations through the use of several non-GAAP financial measures. CNH’s management believes that these non-GAAP financial measures provide useful and relevant information regarding its operating results and enhance the readers’ ability to assess CNH’s financial performance and financial position. Management uses these non-GAAP 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 core operations. These non-GAAP financial measures have no standardized meaning under U.S. GAAP and are unlikely to be comparable to other similarly titled measures used by other companies and are not intended to be substitutes for measures of financial performance and financial position as prepared in accordance with U.S. GAAP.

As of December 31, 2023, CNH’s non-GAAP financial measures are defined as follows:

Adjusted EBIT of Industrial Activities

Adjusted EBIT of Industrial Activities is defined as net income (loss) before: income taxes, Financial Services’ results, Industrial Activities’ interest expenses, net, foreign exchange gains/losses, finance and non-service component of pension and other post-employment benefit costs, restructuring expenses, and certain non-recurring items. Such non-recurring items are specifically disclosed items that management considers rare or discrete events that are infrequent in nature and not reflective of ongoing operational activities.

Net (Cash) Debt and Net (Cash) Debt of Industrial Activities

Net Cash (Debt) is defined as total debt less: intersegment notes receivable, cash and cash equivalents, restricted cash, other current financial assets (primarily current securities, short-term deposits and investments towards high-credit rating counterparties) and derivative hedging debt. CNH provides the reconciliation of Net Cash (Debt) to Total (Debt), which is the most directly comparable measure included in the consolidated balance sheets. 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 Cash (Debt) of Industrial Activities.

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Revenues on a Constant Currency Basis

CNH discusses 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.

Free Cash Flow of Industrial Activities

Free Cash Flow of Industrial Activities (or Industrial Free Cash Flow) refers to Industrial Activities, only, and is computed as consolidated cash flow from operating activities less: cash flow from operating activities of Financial Services; investments of Industrial Activities in assets sold under operating leases, property, plant and equipment and intangible assets; change in derivatives hedging debt of Industrial Activities; as well as other changes and intersegment eliminations.

Operating Results

The operations and key financial measures and financial analysis differ significantly for manufacturing and distribution businesses and financial services businesses; therefore, management believes that certain supplemental disclosures are important in understanding our consolidated operations and financial results. For further information, see “Supplemental Information” within this section, where we present supplemental consolidating data split by Industrial Activities and Financial Services. Transactions between Industrial Activities and Financial Services have been eliminated to arrive at the consolidated data.

2023 Compared to 2022

Consolidated Results of Operations

Revenues

We recorded revenues of $24,687 million in 2023, an increase of 4.8% (up 4.7% on a constant currency basis) compared to 2022. This increase is primarily due to favorable price realization.

Cost of Goods Sold

Cost of goods sold were $16,838 million in 2023 compared to $16,797 million in 2022, an increase of 0.2% year over year. As a percentage of net sales of Industrial Activities, cost of goods sold was 76.3% in 2023 (78.0% in 2022), as a result of favorable price realization, partially offset by higher manufacturing and purchasing costs. For year ended December 31, 2022 this item includes $41 million of asset write-downs due to the suspension of operations in Russia.

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Selling, General and Administrative Expenses

Selling, General and Administrative Expenses ("SG&A") expenses were $1,863 million in 2023 (7.5% of revenues) compared to $1,752 million in 2022 (7.4% of revenues). The year over year increase is primarily due to increased labor costs. For year ended December 31, 2022, SG&A includes $17 million of asset write-downs due to the suspension of operations in Russia.

Research and Development

In 2023, R&D expenses were $1,041 million compared to $866 million in 2022. The expense in both years was primarily attributable to continued investment in new products, technologies and digital solutions.

Restructuring Expenses

The Company incurred restructuring costs of $67 million and $31 million for the years ended December 31, 2023 and 2022, respectively.

Interest Expense

Interest expense increased to $1,345 million in 2023 from $734 million in 2022 primarily due to higher average interest rates on greater external borrowings, supporting working capital requirements and an increase to the financial services portfolio. The interest expense attributable to Industrial Activities, net of interest income and eliminations, was $76 million in 2023 compared to $119 million in 2022.

Other, net

Other, net expenses were $830 million in 2023 and included a pre-tax gain of $24 million ($18 million after-tax) as a result of the amortization over 4 years of the $101 million positive impact from the 2021 U.S. healthcare plan modification and a gain of $13 million in relation to the fair value remeasurement of previously held investments in Augmenta and Bennamann, offset by a loss of $23 million on the sale of CNH Industrial Russia.

Other, net expenses were $689 million in 2022 and included a pre-tax gain of $90 million ($68 million after-tax) as a result of the Benefit Modification Amortization over approximately 4.5 years of the $527 million positive impact from the 2018 U.S. healthcare plan modification, a pre-tax gain of $24 million ($18 million after-tax) as a result of the amortization over 4 years of the $101 million positive impact from the 2021 U.S. healthcare plan modification, a pre-tax gain of $65 million ($70 million after-tax) on the sale of a facility in Canada, $22 million ($54 million after-tax) of loss on the sale of Raven Engineered Films and Aerostar Divisions, net of income from those businesses held for sale during the period, separation costs in connection with the spin-off of the On-Highway business of $25 million ($24 million after-tax), and foreign exchange losses of $59 million.

Income Taxes

In 2023, income taxes were an expense of $594 million, compared to a tax expense of $747 million in 2022. The effective tax rates for 2023 and 2022 were 22.0% and 27.9%, respectively. The 2023 effective tax rate was reduced by the recognition of $99 million of previously unrecognized deferred tax assets in the United Kingdom, lower profitability in high-tax jurisdictions as a percent of total profit, higher credits and incentives, and the tax benefits related to the sale of CNH Industrial Russia; offset by increases in the tax rate due to the tax impact from the Argentina highly inflationary economy and discrete tax expense associated with prior periods.

In 2022, income taxes were an expense of $747 million with an effective tax rate of 27.9%. The Company's 2022 tax rate was increased by greater profitability in high-tax jurisdictions as a percent of total profit, tax expenses associated with the disposition of Raven’s Engineered Films and Aerostar Divisions, additional reserves for uncertain tax positions and the tax impacts associated with Argentina’s highly inflationary economy. These impacts were partially offset by the recognition of $55 million of previously unrecognized deferred tax assets in Italy.

The Organization for Economic Cooperation and Development (the OECD) has proposed a global minimum tax of 15% of reported profits ("Pillar Two") that has been agreed upon in principle by over 140 countries. During 2023, many countries took steps to incorporate Pillar Two model rule concepts into their domestic laws. The Company continues to monitor developments in the Pillar Two legislation and is working to evaluate the impacts of this legislation on its longer-term financial position.

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Equity in Income of Unconsolidated Subsidiaries and Affiliates

Equity in income of unconsolidated subsidiaries and affiliates was $274 million in 2023 compared to $104 million in 2022 primarily from our joint venture. The 2023 equity income includes a foreign exchange impact of $84 million.

Industrial Activities and Business Segments

The following tables include Revenues and Adjusted EBIT of Industrial Activities by segment. We have also included a discussion of our results by Industrial Activities and each of our segments.

(1) A reconciliation from the most closely related U.S. GAAP measure to this non-GAAP measure is included on page 55.

Net sales of Industrial Activities were $22,080 million in 2023, up 2.5% compared to the prior year (up 2.4% on a constant currency basis) primarily due to favorable price realization.

Adjusted EBIT of Industrial Activities was $2,730 million in 2023 ($2,433 million in 2022), with an Adjusted EBIT margin of 12.4%. The increase in adjusted EBIT was primarily attributable to gross margin improvement in our Agriculture and Construction segments, partially offset by increased SG&A expenditures and R&D investments.

Business Segment Performance

Agriculture

Net Sales

The following table includes Agriculture net sales by geographic region in 2023 compared to 2022:

Agriculture Sales – by geographic region:

Net sales for Agriculture were $18,148 million in 2023, a 1.0% increase (up 0.9% on a constant currency basis) compared to 2022. The increase was driven by favorable price realization, partially offset by dealer destocking actions due to lower industry demand.

In North America, industry volume was up 20% year over year in 2023 for tractors over 140 hp and was down 9% for tractors under 140 hp; combines were up 2%. In Europe, Middle East and Africa (EMEA), tractor and combine demand was flat and up 8%,

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respectively, of which Europe tractor and combine demand was down 3% and 3%, respectively. South America tractor demand was down 8% and combine demand was down 18%. Asia Pacific tractor demand was down 5% and combine demand was down 37%.

Adjusted EBIT

Adjusted EBIT was $2,732 million in 2023, compared to $2,456 million in 2022. The $276 million increase was mostly driven by gross margin improvement, partially offset by increased production costs, SG&A expenses and R&D investments. Adjusted EBIT margin was 15.1%.

Construction

Net Sales

The following table includes Construction net sales by geographic region in 2023 compared to 2022:

Construction Sales – by geographic region:

Net sales for Construction were $3,932 million in 2023, a 10.1% increase (up 9.8% on a constant currency basis) compared to 2022, driven by favorable price realization and positive volume/mix mainly in North America; partially offset by lower net revenue from South America, and ceased activities in China and Russia.

Global industry volume for construction equipment decreased in both Heavy and Light sub-segments year over year in 2023, down 14% and 1%, respectively. Aggregated demand increased 2% in EMEA, increased 3% in North America, decreased 24% in South America and decreased 17% for Asia Pacific, particularly in China.

Adjusted EBIT

Adjusted EBIT was $238 million in 2023 (up $114 million compared to 2022). The improvement was due to favorable volume and mix and favorable price realization, partially offset by higher raw materials and manufacturing costs and increased R&D investments. Adjusted EBIT margin was 6.1%.

Financial Services Performance

Finance, Interest and Other Income

Financial Services reported revenues of $2,573 million in 2023, up 28.9% compared to 2022 (up 28.6% on a constant currency basis) primarily driven by favorable volumes and higher base rates across all regions, partially offset by lower used equipment sales due to decreased operating lease maturities.

Net Income

For the year ended December 31, 2023, net income was $371 million, a $33 million increase compared to 2022, driven by favorable volumes in all regions, partially offset by margin compression in all regions, higher risk costs, increased labor costs and higher taxes, primarily due to increased profitability.

In 2023, retail originations (including unconsolidated joint ventures) were $11.5 billion, up $1.5 billion compared to 2022 (up $1.5 billion on a constant currency basis). The managed portfolio (including unconsolidated joint ventures) was $28.9 billion as of December 31, 2023 (of which retail was 64% and wholesale 36%), up $5.1 billion compared to December 31, 2022 (up $4.4 billion on a constant currency basis).

At December 31, 2023, the receivable balance greater than 30 days past-due as a percentage of receivables was 1.4% (1.3% as of December 31, 2022).

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2022 Compared to 2021

Please refer to the “Management’s Discussion and Analysis” section of our 2022 Form 10-K.

Reconciliation of Adjusted EBIT to Net Income (Loss)

The following table includes the reconciliation of Adjusted EBIT for Industrial Activities to net income, the most comparable U.S. GAAP financial measure.

(1) Unallocated items, eliminations and other primarily includes certain corporate costs and other operating expenses and incomes not allocated to segments’ results.

(2) In the years ended December 31, 2023, 2022 and 2021, this item includes a pre-tax gain of $24 million, $24 million and $5 million, respectively as a result of the amortization over 4 years of the $101 million positive impact from the 2021 modifications of a healthcare plan in the U.S. In the years ended December 31, 2022 and 2021 this item includes the pre-tax gain of $90 million and $119 million, respectively as a result of the amortization over approximately 4.5 years of the $527 million positive impact from 2018 modification of a healthcare plan in the U.S.

(3) In the year ended December 31, 2023, this item includes a loss of $23 million on the sale of the CNH Industrial Russia and CNH Capital Russia businesses, partially offset by a gain of $13 million for the fair value remeasurement of Augmenta and Bennamann. In the year ended December 31, 2022, this item included $43 million of asset write-downs, $25 million of separation costs incurred in a connection with our spin-off of the Iveco Group Business and $22 million of costs related to the activity of the Raven segments held for sale, including the loss on the sale of the Engineered Films and Aerostar divisions, partially offset by a $65 million dollar gain on the sale of our Canada parts depot. In the year ended December 31, 2021, this item included $133 million separation costs in connection with the spin-off of the Iveco Group Business and a charge of $57 million for transaction costs related to the acquisition of Raven Industries, Inc., partially offset by a gain of $12 million for a fair value adjustment of Monarch Tractor investments.

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