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CNH's Earnings Surge, Misses Est.

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CNH Global N.V. recently reported a net income (excluding restructuring and exceptional items) of $356 million in the second quarter of 2012, surging 11.3% year over year and 32.3% sequentially.

Diluted EPS was $1.47 in the quarter versus $1.33 in the prior year quarter and $1.11 in the previous quarter. The results failed to meet the Zacks Consensus Estimate by a cent during the quarter.

The rise in net income was driven by the company’s widespread business across all regions and impressive performances in the financial and industrial services businesses neutralizing the negative effect of the currency translation during the quarter.

Revenues

Net sales for the second quarter amounted to $5.03 billion, proliferating 3% year over year and 8.3% sequentially, driven by the mounting demand for the company’s Agricultural Equipment business with moderated agricultural product prices. The result, however, missed the Zacks Consensus Estimate of $5.21 billion.

Segment-wise, Agricultural Equipment sales amounted to $4.0 billion, increasing 4.5% annually and 11.3% sequentially on the back of the company’s impressive pricing structure, positive product mix and increased volume. The segment witnessed accelerated revenue growth in all of its regions (based on constant currency).

Construction Equipment sales came to $1.0 billion with a 2.8% yearly and 2.2% sequential decline. The reduction in sales was attributable primarily to the reduced unit volume, weak scenario in Europe and Brazil and adverse impact of currency translation.

Margins

Agriculture Equipment’s gross margin in the second quarter surged year over year to 22.7% from 22.1% in the second quarter of 2011 and 21.0% in the previous quarter. Gross margin for the Construction Equipment segment increased to 13.8% from 13.4% in the previous year period and 15.1% in the last quarter.

Operating margin for Agricultural Equipment came to 12.6% compared with 12.9% in the previous year quarter and 10.3% in the last quarter. This was a result of product and pricing mix benefits.

The currency translation and weak business conditions in Europe and Brazil, proved detrimental to the Construction Equipment margin during the quarter, due to which operating margin dropped to 1.7% from 2.4% in the previous year period and 3.3% in the last quarter.

Effective tax rate for the second quarter of 2012 were in line with management’s previously provided forecast of 32% - 35% for full year 2012, coming in at 32%.

Selling, general and administrative expense was $426 million compared with $455 million in the year-earlier quarter and research, development and engineering expense was $162 million compared with $125 million in the prior-year quarter.

Balance Sheet and Cash Flows

Exiting the second quarter of 2012, the cash and cash equivalents came in at $1.1 billion up from $950 million at the end of March 2012. Long-term debt was $12.9 billion at the end of June 30, 2012 compared to $13.2 billion at the end of the previous quarter.

Year to date, net cash used by operating activities was $639 million versus $178 million in the previous year period. Year-to-date, capital expenditures incurred were $206 million, increasing 64% from the prior year period.

Outlook

As CNH Global traverses through 2012, the company looks forward to an overall accelerated performance even with the negative impact from the currency translation and clouded economic scenario in U.S. Management expects that the industry’s Agricultural and Construction Equipment unit volumes will likely be flat to down in 2012. Moreover, the company’s revenues are expected to grow more than 5% with operating margins above 8.6% in 2012.

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