Cummins Inc. Q3 2017 Financial Summary
Business Context and Reporting Period
This Form 8-K, dated October 31, 2017, reports the unaudited financial results for Cummins Inc. for the third quarter and nine months ended October 1, 2017. The company operates through four segments: Engine, Distribution, Components, and Power Systems. Notable corporate developments include the consolidation of the Eaton Cummins Automated Transmission Technologies joint venture in Q3 2017 and a subsequent agreement to acquire Brammo Inc. for approximately $70 million.
Key Financial Metrics
| Metric (in millions) | Q3 2017 | Q3 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Net Sales | $5,285 | $4,187 | $14,952 | $13,006 |
| Gross Margin | $1,339 | $1,079 | $3,716 | $3,332 |
| Operating Income | $629 | $384 | $1,770 | $1,421 |
| Net Income (Cummins Inc.) | $453 | $289 | $1,273 | $1,016 |
| Diluted EPS | $2.71 | $1.72 | $7.60 | $5.99 |
| Operating Cash Flow (YTD) | $1,471 (vs. $1,314 YTD 2016) | |||
| Cash & Equivalents | $1,290 (as of Oct 1, 2017) | |||
| Total Debt | $1,677 (Long-term $1,615 + Current $62) |
Material Changes vs. Prior Period
- Revenue Growth: Q3 Net Sales increased 26% year-over-year, driven by higher unit volumes and favorable foreign exchange rates. YTD sales grew 15%.
- Profitability Expansion: Q3 Operating Income rose 64% to $629 million, and Net Income increased 57% to $453 million. This was significantly aided by the absence of a $99 million loss contingency recorded in Q3 2016 related to engine emissions.
- Segment Performance: The Components segment saw a significant boost in EBIT due to the consolidation of the Eaton joint venture. The Engine segment reported strong growth in heavy-duty truck and off-highway sales.
- Balance Sheet: Total assets increased to $17.99 billion from $15.01 billion at year-end 2016, reflecting acquisitions and working capital growth. Goodwill increased to $1.036 billion due to the Eaton transaction.
Outlook, Risks, and Unusual Items
- Engine System Loss Contingency: The company recorded a $29 million charge in Q3 2017 for field campaigns to repair pre-2013 model year engine systems failing emissions testing due to aftertreatment component degradation. While no fines are currently expected, the company is evaluating other model years (2010-2015) and cannot yet estimate the total potential impact.
- Acquisitions: The company consolidated the Eaton Cummins Automated Transmission Technologies joint venture in Q3 2017. Additionally, a subsequent event disclosed an agreement to acquire Brammo Inc. for $70 million plus a potential $100 million earnout, expected to close in Q4 2017.
- Dividends: Cash dividends declared per common share increased to $1.08 for Q3 2017 from $1.025 in the prior year.
Investor Verification Checklist
- Verify the extent of the "Engine System Loss Contingency" regarding model years 2010-2015 and potential future charges beyond the $29 million already recorded.
- Confirm the integration progress and financial contribution of the Eaton Cummins Automated Transmission Technologies joint venture in upcoming quarters.
- Monitor the closing timeline and final valuation of the Brammo Inc. acquisition, including the likelihood of the $100 million earnout payment.
- Review the sustainability of the 26% Q3 sales growth, distinguishing between organic volume growth and foreign exchange impacts.
- Assess the impact of increased commercial paper borrowings ($514 million) on short-term liquidity and interest expense.