Cummins Inc. 2021 Third-Quarter Form 10-Q
Reporting period: The quarter ended October 3, 2021; comparisons are with the quarter ended September 27, 2020. Year-to-date figures cover the nine months ended on those dates. Unless otherwise noted, amounts are in millions of dollars.
Business context and financial performance
Cummins designs, manufactures, distributes and services powertrains and related products, including diesel, natural gas, electric, hybrid and hydrogen technologies. Its reportable segments are Engine, Distribution, Components, Power Systems and New Power. Management said 2020 comparisons were affected by COVID-19 shutdowns, while 2021 demand improved broadly. Supply-chain constraints continued to limit production and deliveries.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $5,968 | $5,118 | $18,171 | $13,981 |
| Gross margin | $1,414 | $1,349 | $4,378 | $3,533 |
| Gross margin as % of sales | 23.7% | 26.4% | 24.1% | 25.3% |
| Operating income | $666 | $670 | $2,211 | $1,640 |
| Net income attributable to Cummins | $534 | $501 | $1,737 | $1,288 |
| Diluted EPS | $3.69 | $3.36 | $11.86 | $8.65 |
| Operating cash flow | Not stated for quarter | $1,524 | $1,580 |
Q3 sales rose 17% and attributable net income rose 7%; diluted EPS increased 10%. For the first nine months, sales rose 30%, attributable net income 35%, and diluted EPS 37%. Higher sales and volumes supported gross profit, but the gross-margin rate declined 2.7 percentage points in Q3 and 1.2 points year to date. Management attributed the pressure chiefly to compensation, freight and material costs rising faster than sales. Q3 operating income was slightly lower despite higher revenue.
Growth was broad across the main segments. Year-to-date segment sales increased 32% for Engine, 11% for Distribution, 42% for Components and 26% for Power Systems. Components EBITDA declined 3% in Q3 as cost pressures outweighed volume growth; New Power recorded an EBITDA loss of $58 million in Q3 and $169 million year to date. The filing’s segment EBITDA measures are non-GAAP measures.
Balance sheet, debt and liquidity
- At October 3, 2021, cash and cash equivalents were $2,588 and marketable securities were $430, totaling $3,018, down from $3,862 at December 31, 2020.
- Total debt was $3,942, versus $4,164 at year-end 2020; debt to total capital was 30.5%, down from 31.7%. Cash and marketable securities were below total debt.
- Working capital was $5,459 and the current ratio was 1.80, compared with $5,562 and 1.88 at year-end. Inventory increased to $4,322 from $3,425.
- The company had $200 of commercial paper outstanding, no borrowings under its revolving facilities, and reported $3,300 of available revolving capacity plus $268 under other facilities. Management described liquidity as strong and cited $6.3 billion of liquidity in its outlook discussion.
- Operating cash flow was $1,524 year to date, compared with $1,580 in 2020. Working-capital requirements used $466 of cash, primarily reflecting higher inventory and receivables.
- Year-to-date investing cash outflow was $278; financing cash outflow was $2,079, including $1,228 of share repurchases and $601 of dividends.
Changes, outlook and material risks
- Demand and costs: Management expected North American truck demand and aftermarket activity to improve, and anticipated better truck demand in India. It cautioned that supply shortages, premium freight and higher material and commodity costs could constrain output and earnings; it expected Chinese truck and construction demand to decline from 2020 record levels.
- Guidance: The company expected a 2021 effective tax rate of approximately 21.5%, excluding discrete items. It planned 2021 capital expenditures of $725–$775 million, excluding internal-use software, plus $50–$60 million for software. The filing provides no clear full-year revenue or earnings guidance.
- Tax and other items: The nine-month 2021 effective tax rate was 21.1%, including $8 million of favorable discrete tax items. Stock repurchases reduced year-to-date diluted EPS by fewer shares outstanding, contributing $0.23 per share, according to management. The company repurchased 5.0 million shares for $1,228 and raised its quarterly dividend 7.4% to $1.45 per share.
- Filtration business: Cummins was exploring strategic alternatives, including separating the filtration business into a stand-alone company; no outcome was assured.
- Emissions review: The EPA and CARB raised concerns about emissions systems in pickup-truck applications, including model years 2013–2018. Cummins said it could not estimate the financial impact; remediation could materially adversely affect results and cash flows.
- Warranty and contingencies: The total product-warranty liability was $1,397; the combined warranty accrual, including deferred revenue for extended coverage, was $2,375. The remaining accrual for the earlier engine-system emissions campaign was $94. Other litigation and claims were described as not material individually or in aggregate, but outcomes could differ from estimates.
- Other risks: COVID-19 resurgence, employee vaccine requirements, supplier disruptions, regulation, commodity prices, foreign exchange and market demand could affect operations. Management said the potential workforce effects of vaccine requirements were uncertain.
Key facts for investors to verify
- Whether supply-chain availability, freight and materials costs affect subsequent-quarter volumes and gross margins.
- Any developments, remediation requirements or estimated costs from the EPA/CARB emissions review.
- Progress and terms, if any, in the exploration of strategic alternatives for filtration.
- Inventory, receivables and operating cash flow trends, given the significant year-to-date working-capital cash use.
- Warranty accrual estimates, including the emissions campaign balance, and any new product campaigns or supplier recoveries.
- Actual full-year performance against the stated tax-rate and capital-spending expectations; the filing does not give a clear full-year sales or earnings target.