Cummins Inc. Q1 2018 Financial Summary
Business Context and Reporting Period
This Form 8-K, dated May 1, 2018, reports the unaudited financial results for Cummins Inc. for the first quarter ended April 1, 2018. The company operates through Engine, Distribution, Components, Power Systems, and a newly formed Electrified Power segment (effective Jan 1, 2018).
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net Sales | $5,570 million | $4,589 million |
| Gross Margin | $1,200 million (21.5%) | $1,132 million (24.7%) |
| Operating Income | $530 million | $540 million |
| Net Income (Cummins Inc.) | $325 million | $396 million |
| Diluted EPS | $1.96 | $2.36 |
| EBITDA | $700 million | $705 million |
| Cash and Equivalents | $1,207 million | $1,322 million (end of period) |
| Long-term Debt | $1,571 million | $1,588 million |
Cash Flow: Operating cash flow was negative $117 million, compared to positive $379 million in the prior year, primarily due to working capital changes and loss contingency payments. Free cash flow was negative $189 million after capital expenditures of $72 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 21.4% year-over-year, driven by strong performance in the Engine ($1,813M vs $1,457M) and Components ($1,313M vs $980M) segments.
- Profitability Decline: Despite revenue growth, Net Income decreased 17.9% and Operating Income declined 1.9%. This was primarily due to a significant increase in the effective tax rate (37.9% vs 26.1%) and a large charge for engine system campaigns.
- Expense Increases: Research, development, and engineering expenses rose to $210 million from $158 million. Selling, general, and administrative expenses increased to $577 million from $547 million.
- Working Capital: Accounts receivable increased by $227 million and inventories by $245 million, contributing to the negative operating cash flow.
Outlook, Risks, and Unusual Items
- Engine System Campaign Charge: The company recorded an additional $187 million charge ($0.87 per share) to cost of sales related to expanded field campaigns for pre-2013 model year engine systems failing emissions tests. Management estimates a potential incremental exposure of up to $400 million above the current accrual if proposed solutions are not accepted by regulators.
- Tax Impact: The effective tax rate included $78 million ($0.47 per share) of unfavorable discrete tax items related to the 2017 Tax Cuts and Jobs Act adjustments. Excluding these items, diluted EPS would have been $2.43.
- Guidance: The company expects the full-year effective tax rate to approximate 23.0%, excluding discrete items. No specific revenue or earnings guidance for the remainder of 2018 is provided in this filing.
- Dividends: Cash dividends declared per common share increased to $1.08 from $1.025 in the prior year.
Investor Verification Checklist
- Verify the status of the CARB and EPA engine system campaign and the likelihood of the $400 million incremental exposure materializing.
- Confirm the trajectory of the effective tax rate for the remainder of 2018 as discrete tax items are resolved.
- Monitor working capital trends, specifically the build-up in inventory and receivables, to assess future cash flow generation.
- Review the performance of the new Electrified Power segment and its contribution to future growth.
- Assess the impact of the $187 million charge on the company's ability to maintain its dividend and share repurchase program ($163 million in repurchases in Q1).