Cummins Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report. Unless noted otherwise, amounts are in U.S. dollars.
Business context
Cummins designs, manufactures, distributes and services diesel and natural-gas engines, related components, power-generation systems and distribution services. Its four operating segments are Engine, Components, Power Generation and Distribution. The company operated in more than 190 countries and territories and generated 53% of 2012 sales outside the United States. PACCAR was its largest customer, at approximately 13% of consolidated sales.
Key financial metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $17.334 billion | $18.048 billion |
| Gross margin | $4.508 billion; 26.0% of sales | $4.589 billion; 25.4% of sales |
| Operating income | $2.254 billion | $2.681 billion |
| Net income attributable to Cummins | $1.645 billion | $1.848 billion |
| Diluted EPS | $8.67 | $9.55 |
| Operating cash flow | $1.532 billion | $2.073 billion |
| Capital expenditures | $690 million | $622 million |
| Cash and marketable securities, year-end | $1.616 billion | $1.761 billion |
| Total debt, year-end | $775 million | $783 million |
| Working capital / current ratio | $4.031 billion / 2.29 | $3.434 billion / 1.94 |
Fourth-quarter 2012 sales were $4.292 billion, net income attributable to Cummins was $369 million, and diluted EPS was $1.95. The filing reports total segment EBIT of $2.328 billion; after non-segment items, total EBIT was $2.303 billion.
Material changes versus 2011
- Sales fell 4%; net income attributable to Cummins fell 11%, and diluted EPS declined 9%.
- Gross margin dollars decreased, but gross margin as a share of sales improved 0.6 percentage points to 26.0%, reflecting lower material costs, improved pricing, lower warranty costs and favorable mix, partly offset by lower volumes, currency effects and restructuring charges.
- Operating cash flow declined $541 million. Working-capital changes used $775 million of cash, versus $154 million in 2011, with lower accrued expenses and accounts payable and higher cash taxes among the factors.
- Engine sales declined 5% and segment EBIT 10%; Components sales declined 1% and EBIT 9%; Power Generation sales declined 7% and EBIT 24%. Distribution sales rose 8%, partly reflecting acquisitions, while EBIT fell 4%.
- 2011 included significant divestiture gains and a flood-insurance recovery that did not recur in 2012. In 2012, a one-time $134 million U.K.-related tax benefit helped lower the effective tax rate to 23.5% from 27.1%.
Liquidity, capital allocation and debt
Year-end cash and cash equivalents were $1.369 billion, with an additional $247 million in marketable securities. The current ratio improved to 2.29. Total debt was $775 million and debt to total capital was 10.0%, down from 11.8%. Cummins had $1.727 billion available under a new $1.75 billion five-year revolving credit facility, after letters of credit; it also reported $301 million available under other short-term facilities. The company reported compliance with its debt covenants.
In 2012, Cummins repurchased $256 million of shares and paid $340 million in common dividends. The quarterly dividend was raised from $0.40 to $0.50 per share beginning in the third quarter. Management described liquidity as strong.
Outlook, commentary and unusual items
- 2013 outlook: Management expected most markets to be weak in the first quarter, with some improvement in the second half; first-half activity was expected to remain below 2012 levels. Potential positives included stronger Brazilian demand and a new Navistar supply agreement. Risks to the outlook included U.S. fiscal uncertainty, weaker European demand, currency volatility, low Chinese industrial inventories clearing slowly, and continued weakness in North American oil and gas and mining markets.
- Investment plans: Management expected 2013 capital expenditures of approximately $850 million, with more than half outside the U.S. It expected approximately $170 million in pension contributions and pension and other postretirement benefit expense to rise about $35 million pre-tax versus 2012.
- Restructuring: The company recorded $52 million of restructuring and other charges, including workforce reductions affecting approximately 1,300 employees. It estimated annualized savings of about $39 million from professional workforce actions.
- Acquisitions: Cummins paid $176 million for Hilite doser technology and assets, and approximately $20 million for an additional 45% interest in Cummins Central Power. The latter transaction included a $7 million remeasurement gain.
- Key risks: Cyclical market demand and infrastructure spending; dependence on customer engine outsourcing and major truck OEMs; emissions regulation and product-development costs; supplier concentration (60–70% of types of parts were single-sourced); currency and commodity volatility; product recalls and warranty exposure; reliance on unconsolidated investees; pension assumptions; and litigation, tax and environmental contingencies. Cummins had $233 million capitalized for a light-duty diesel engine platform that could require impairment if expected customer volumes deteriorate.
- Contingencies and commitments: The company described ordinary-course litigation and environmental matters as not material individually or in the aggregate, while cautioning that outcomes could adversely affect results. It also disclosed a supplier take-or-pay commitment of approximately $73 million annually through 2018 and $86 million of additional joint-venture investment commitments.
Important facts for investors to verify
- Whether end-market demand and segment profitability recovered as management anticipated, particularly in China, Brazil, North American trucks and Power Generation.
- Whether operating cash flow and working capital improved after the substantial 2012 cash outflow from working-capital changes.
- Whether the estimated $39 million annualized restructuring savings were achieved and whether further charges followed.
- Whether the one-time U.K. tax benefit and other tax items distort comparisons; the filing forecast a 2013 effective tax rate of about 26%, excluding one-time items.
- Whether pension funding, lower discount rates and expected returns increased future expense or cash contributions beyond management’s estimates.
- Whether PACCAR concentration, supplier commitments, the light-duty diesel investment and legal or tax exposures changed materially.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2012.