Cummins Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Cummins designs, manufactures, distributes and services powertrains and related components, including diesel, natural gas, electric, hybrid and hydrogen technologies. This unaudited report covers the quarter and six months ended June 30, 2022. The comparable 2021 periods ended July 4 because Cummins moved to calendar-quarter reporting in 2022.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $6.586B | $6.111B | $12.971B | $12.203B |
| Gross margin | $1.726B; 26.2% | $1.478B; 24.2% | $3.258B; 25.1% | $2.964B; 24.3% |
| Operating income | $897M | $735M | $1.501B | $1.545B |
| Net income attributable to Cummins | $702M | $600M | $1.120B | $1.203B |
| Diluted EPS | $4.94 | $4.10 | $7.86 | $8.16 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $763M | $955M |
Q2 sales rose 8% and net income rose 17%; six-month sales rose 6%, while net income fell 7%. Gross-margin gains reflected pricing and volume, partly offset by material costs; the six-month comparison also included higher freight costs and unfavorable currency effects. The six-month effective tax rate was 21.1%, versus 21.7% in 2021; Q2’s 17.3% rate benefited from favorable discrete tax items.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $2.462B and marketable securities were $536M, totaling $2.998B.
- Total debt was $4.425B, versus $4.159B at December 31, 2021; debt to total capital was 31.4%, up from 30.7%. Working capital was $5.091B and the current ratio was 1.66.
- Six-month operating cash flow declined $192M year over year, primarily because of higher working-capital requirements. Cash used in investing was $576M, including acquisitions and capital spending; cash used in financing was $391M.
- At June 30, Cummins reported $2.795B of available revolving credit capacity and $271M under other facilities. It had $705M of commercial paper outstanding.
- After quarter-end, Cummins drew a $2.0B term loan and borrowed an additional $1.3B in commercial paper to fund its Meritor acquisition. The filing reported revolving-credit borrowing capacity of $1.43B after the acquisition.
Material changes and segment trends
- Q2 revenue increased across Engine, Distribution and Power Systems, while Components revenue declined 2% on lower China demand. Distribution sales rose 17% and Engine sales rose 11%; Distribution EBITDA increased 48%, while Power Systems EBITDA declined 8%.
- For the first six months, Engine sales rose 12% and Distribution sales rose 16%; Components sales fell 5% and Power Systems EBITDA fell 18%. Lower investee income, including from China, weighed on results.
- Russia-related suspension costs were $111M for the six-month period, compared with a $47M recovery in Q2. The company had $17M of Russian inventory and $26M of receivables, all fully reserved, and $84M of cash in Russia.
- Cash dividends paid in the first half were $411M; the Board later increased the quarterly dividend about 8%, from $1.45 to $1.57 per share. Cummins repurchased $347M of stock in the first half.
Outlook, risks and unusual items
- Management cited expected strength in North American truck demand, India truck demand and aftermarket activity. It also noted supply constraints, inflation, higher material and freight costs, and China’s COVID-related slowdown as risks to production, revenue and profitability.
- Management expected a 2022 effective tax rate of approximately 21.5%, excluding discrete items; planned 2022 capital expenditures of $850M–$900M, excluding internal-use software; and internal-use software spending of $60M–$70M.
- On August 3, 2022, Cummins completed its $3.0B acquisition of Meritor. The company expected integration costs and incremental interest expense; initial purchase accounting was not complete at filing.
- Cummins indefinitely suspended Russian operations. KAMAZ was designated a U.S. blocked party in June, and Cummins was seeking authorizations to exit the relationship. Further costs, collection issues or litigation remained possible.
- Regulators’ emissions review remains ongoing. Cummins accrued $30M for a recall of model-year 2013–2018 RAM 2500/3500 trucks; it said additional financial impacts could be material but could not yet be estimated.
- Product warranty liabilities and related extended-warranty deferred revenue totaled $2.526B at June 30. The filing also disclosed ordinary-course litigation and other contingencies, including potential supplier minimum-purchase penalties of approximately $126M if purchases ceased; management did not anticipate paying those penalties.
Important facts for investors to verify
- Whether supply-chain constraints, input-cost inflation and China market weakness continue to pressure volumes and margins.
- Meritor’s purchase accounting, financing costs, integration progress and realized benefits, including the post-acquisition liquidity position.
- Any new charges or operational restrictions tied to Russia, sanctions, KAMAZ or the suspended business.
- Developments in the EPA/CARB emissions review and whether the recall accrual or related exposure changes.
- Cash conversion and working-capital trends, alongside warranty costs and the company’s ability to sustain planned investment and shareholder returns.