Cummins Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparison is with the corresponding 2022 periods. Unaudited consolidated financial statements. Cummins designs, manufactures, distributes and services powertrain, component, power generation and electrification products globally.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $8.431 billion | $7.333 billion | $25.522 billion | $20.304 billion |
| Gross margin | $2.071 billion; 24.6% | $1.642 billion; 22.4% | $6.248 billion; 24.5% | $4.900 billion; 24.1% |
| Operating income | $950 million | $626 million | $2.973 billion | $2.127 billion |
| Net income attributable to Cummins | $656 million | $400 million | $2.166 billion | $1.520 billion |
| Diluted EPS | $4.59 | $2.82 | $15.19 | $10.68 |
- Q3 sales rose 15%; nine-month sales rose 26%. Growth reflected higher demand across most segments and the Meritor acquisition, especially its axles and brakes business.
- Gross margin improved year over year, supported by pricing, volume, lower freight costs and favorable mix; higher compensation costs partly offset gains.
- Interest expense increased to $97 million in Q3 and $283 million year to date, from $61 million and $112 million, respectively, primarily due to higher floating rates and borrowings.
- Operating cash flow was $2.507 billion for the first nine months, versus $1.145 billion. Capital expenditures were $694 million; operating cash flow less capital expenditures was approximately $1.813 billion.
- At September 30, cash, cash equivalents, restricted cash and marketable securities totaled $3.064 billion. Total debt was $7.464 billion; debt to total capital was 39.0%, down from 44.1% at year-end 2022. Working capital was $4.786 billion and the current ratio was 1.43.
Material changes and segment trends
- Components sales increased 20% in Q3 and 54% year to date; segment EBITDA rose 48% in both periods. Meritor-related axles and brakes were the principal sales driver.
- Distribution sales rose 13% in Q3 and 14% year to date; EBITDA increased 36% and 49%, respectively, reflecting volume and mix, particularly in North America and power generation.
- Engine sales grew 5% in Q3 and 7% year to date; EBITDA increased 9% in both periods. Stronger heavy- and medium-duty truck demand was partly offset by softness in some off-highway and light-duty markets.
- Power Systems sales increased 7% in Q3 and 14% year to date; EBITDA rose 21% and 59%, led by power generation demand and pricing.
- Accelera sales increased from a smaller base, to $103 million in Q3 and $273 million year to date, while segment EBITDA losses widened to $114 million and $322 million, respectively, reflecting its early commercialization stage.
- The Atmus filtration IPO took place in May. Cummins sold 19.5% of its ownership, received $650 million of consideration, and continued consolidating Atmus while retaining control. Management intends, subject to market conditions, to pursue a tax-free split-off.
Outlook, commentary and risks
- Management expected 2023 effective tax rate to be approximately 22%, excluding discrete items, and planned 2023 capital expenditures of $1.2–$1.3 billion. No specific consolidated revenue or EPS forecast is stated in the provided filing text.
- Management cited expected strength in North American medium-duty trucks, India truck markets, Power Systems and aftermarket demand, while anticipating some aftermarket softening later in the year and improvement in China truck demand from 2022 lows.
- Challenges include supply constraints, materials and labor inflation, higher interest rates, possible North American automotive labor disruptions, Meritor-related interest and amortization expense, and continuing Atmus separation costs.
- Regulatory discussions with the EPA and CARB concern emissions certification for certain RAM and Nissan Titan pickup applications. Cummins plans recalls for specified model years and has accrued $30 million for the RAM recall and $29 million for the Titan recall. It says further resolutions, potentially including consent decrees and civil penalties, could materially affect results and cash flow; further loss cannot currently be estimated.
- Other contingencies include ordinary-course litigation and environmental matters. The company says it believes pending matters are adequately accrued where estimable, but outcomes could have an adverse effect.
- Supply-chain disruptions continued to constrain production and raise costs. Goodwill testing found no impairment, but two Components reporting units had limited valuation headroom: approximately 7% for automated transmissions and 12% for axles and brakes.
- Subsequent events: Cummins repaid $500 million of senior notes on October 2, 2023, acquired Faurecia’s U.S. and Europe commercial vehicle exhaust business for approximately €199 million, and repaid a further $150 million of term debt on October 31, 2023.
Important facts for investors to verify
- Progress, scope, final costs and potential penalties associated with the emissions review and recalls.
- Whether demand and margins remain resilient as supply constraints, inflation and truck-market conditions change, and how much reported growth reflects Meritor acquisition effects.
- Debt maturities, borrowing costs, commercial paper usage and liquidity after the subsequent debt repayments and acquisition.
- Atmus separation timing, tax treatment and related costs; also the expected investment and regulatory approvals for the proposed U.S. battery-cell joint venture.
- Potential warranty, litigation and goodwill exposure, including the limited valuation headroom in the two Components reporting units.