Cummins Inc. Q3 2016 Financial Summary
Business Context and Reporting Period
This Form 8-K, filed on November 1, 2016, reports the unaudited financial results for Cummins Inc. for the third quarter and nine months ended October 2, 2016. The Company recently realigned its reportable segments, combining the Power Generation segment and high horsepower engine business into a new "Power Systems" segment effective in the second quarter of 2016.
Key Financial Metrics
| Metric (in millions) | Q3 2016 | Q3 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Net Sales | $4,187 | $4,620 | $13,006 | $14,344 |
| Gross Margin | $1,079 | $1,208 | $3,332 | $3,735 |
| Operating Income | $384 | $557 | $1,421 | $1,828 |
| Net Income (Cummins Inc.) | $289 | $380 | $1,016 | $1,238 |
| Diluted EPS | $1.72 | $2.14 | $5.99 | $6.90 |
| Cash from Operations (YTD) | $1,310 (vs $1,131 YTD 2015) | |||
| Cash & Equivalents (End of Period) | $1,251 (vs $1,711 Dec 31, 2015) | |||
| Total Debt (Current + Long-term) | $1,949 (Current: $35M, Long-term: $1,593M) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 9.4% in Q3 and 9.3% YTD compared to the prior year, driven by lower unit volumes across Engine and Power Systems segments.
- Profitability Impact: Operating income fell 31% in Q3 and 22% YTD. A significant factor was a $99 million loss contingency charge in Q3 (totaling $138 million YTD) related to an expanded field campaign for emission system quality issues.
- EBITDA/EBIT: Segment EBIT was $398 million in Q3 (9.5% margin) compared to $577 million (12.5% margin) in Q3 2015.
- Share Count: Weighted average diluted shares outstanding decreased to 168.2 million in Q3 2016 from 177.4 million in Q3 2015, reflecting continued share repurchases ($745 million YTD).
Outlook, Risks, and Unusual Items
- Loss Contingency: The Company recorded an additional $99 million accrual in Q3 2016 for a field campaign addressing quality issues in third-party aftertreatment systems. The final cost remains uncertain as no cost-sharing agreement has been reached with the customer.
- Segment Reorganization: Results for the new Power Systems segment are reported for the first time. Historical periods were adjusted for the new cost allocation methodology, which shifted more costs to Distribution and Components segments.
- Dividends: Cash dividends declared per common share increased to $1.025 in Q3 2016 from $0.975 in Q3 2015.
- Liquidity: Cash and cash equivalents decreased by $460 million YTD, primarily due to financing activities including $745 million in stock repurchases and $505 million in dividend payments.
Investor Verification Checklist
- Verify the final cost and customer cost-sharing agreement status regarding the $138 million emission system loss contingency.
- Monitor the impact of the new segment cost allocation methodology on future Distribution and Components segment margins.
- Assess the sustainability of the 9.5% EBIT margin given the decline in heavy-duty truck and power generation unit shipments.
- Review the $273 million increase in commercial paper borrowings and its impact on short-term liquidity.