Cummins Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter ended July 4, 2021; year-to-date figures cover the six months ended that date. Comparatives are the quarter and six months ended June 28, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in millions. Cummins designs, manufactures, distributes and services powertrains, components and power systems worldwide.
Financial performance
- Q2 revenue: $6.111 billion, up 59% year over year; first-half revenue was $12.203 billion, up 38%. Management attributed growth primarily to higher demand across segments and regions as markets recovered from COVID-related disruptions in 2020.
- Profit: Q2 operating income was $735 million versus $336 million; net income attributable to Cummins was $600 million versus $276 million. Diluted EPS was $4.10 versus $1.86. First-half operating income was $1.545 billion versus $970 million; attributable net income was $1.203 billion versus $787 million, and diluted EPS was $8.16 versus $5.29.
- Margins: Q2 gross margin was 24.2% of sales, up from 23.1%. First-half gross margin was 24.3%, down from 24.6%. Higher volume and pricing supported margins; compensation, premium freight and commodity costs were headwinds.
- Cash flow: First-half operating cash flow was $955 million, compared with $357 million. Investing used $146 million and financing used $1.722 billion; cash and cash equivalents fell by $920 million to $2.481 billion. Capital expenditures were $212 million, plus $22 million for internal-use software.
- Balance sheet and liquidity: Cash, cash equivalents and marketable securities totaled $2.919 billion. Total debt was $3.931 billion, down from $4.164 billion at year-end 2020; debt was 30.9% of total capital versus 31.7%. Working capital was $5.327 billion and the current ratio was 1.81. The company reported $3.3 billion of available revolving credit capacity and another $243 million under international and other domestic facilities. Management described liquidity as strong and cited $6.2 billion of liquidity.
- Shareholder returns: Cummins repurchased $1.090 billion of stock in the first half, or 4.4 million shares, and paid $394 million in dividends. In July, the Board raised the quarterly dividend 7.4%, from $1.35 to $1.45 per share.
Segments and changes versus prior year
All segments reported higher sales than in the COVID-affected 2020 comparison. Q2 external sales were Engine $1.920 billion, Distribution $1.913 billion, Components $1.556 billion, Power Systems $699 million and New Power $23 million. Segment EBITDA was $402 million, $201 million, $301 million, $139 million and negative $60 million, respectively. New Power remains in development and continued to report a loss.
For the first half, external sales increased across Engine, Distribution, Components and Power Systems; Components had the largest percentage increase, up 65%. Total segment EBITDA rose to $1.993 billion from $1.340 billion. Revenue recovery and pricing supported results, while semiconductor shortages and other supply constraints limited the industry’s ability to meet demand. The Q2 and first-half comparisons also reflect the unusually weak 2020 periods.
Outlook, risks and unusual items
- Outlook: Management expected North American pickup demand to remain strong, North American medium- and heavy-duty truck demand to improve from 2020, Indian truck demand to improve, and the North American aftermarket to benefit from higher truck utilization. The filing did not provide full-year revenue or earnings guidance.
- Costs and operating risks: Semiconductor and other supply shortages could delay production, raise premium freight costs and result in lost sales. Material and commodity cost increases may pressure earnings. Management also flagged possible declines in Chinese truck and construction demand from 2020 record levels and potential facility closures or restructuring charges.
- Spending and tax expectations: 2021 capital expenditures were estimated at $725–$775 million, excluding internal-use software; software spending was estimated at $60–$70 million. Management expected a 2021 effective tax rate of approximately 21.5%, excluding discrete items, and annual net periodic pension cost of approximately $79 million.
- Filtration: On August 3, 2021, after quarter-end, Cummins announced it was exploring strategic alternatives for its filtration business, including a possible separation into a standalone company. No transaction was assured.
- Emissions and legal exposure: Cummins continued its internal review and work with regulators concerning emissions certification for pickup-truck applications. It stated that the outcome and potential financial impact could not be predicted and could be material. Other litigation and claims were described as ordinary-course matters; the company said it had accrued estimated liabilities where reasonably estimable.
- Warranty and other items: The remaining accrual for the pre-2013 engine-system emissions campaign was $109 million. Total warranty-related balances were $2.304 billion. Q2 results included an $18 million gain on sale of land; first-half other income included a $12 million loss on corporate-owned life insurance. Q2 diluted EPS benefited about $0.04 from lower share count, and first-half diluted EPS benefited about $0.10.
Important facts for investors to verify
- Whether supply constraints, especially semiconductor availability, ease or continue to limit shipments and raise costs.
- Whether the strong year-over-year growth persists against less depressed comparison periods, and how pricing, compensation and commodities affect margins.
- The status, scope and potential cost of the emissions review and related regulatory processes.
- Whether the filtration strategic-alternatives review leads to a separation or other transaction, and on what terms.
- Cash conversion and working-capital needs, including inventory growth, alongside planned capital spending, repurchases and dividends.
- The maturity and renewal of the $1.5 billion 364-day credit facility, scheduled to expire August 18, 2021.