Cummins Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are noted below. Amounts are in U.S. dollars unless stated otherwise.
Business context
Cummins designs, manufactures, distributes and services diesel and natural-gas engines, power-generation systems and related components. Its four segments are Engine, Power Generation, Components and Distribution. The global recession sharply reduced demand across the markets it serves.
Financial performance and liquidity
| Metric | 2009 | 2008 |
|---|---|---|
| Net sales | $10.800 billion | $14.342 billion |
| Gross margin | $2.169 billion; 20.1% of sales | $2.940 billion; 20.5% of sales |
| Operating income | $682 million | $1.272 billion |
| Net income attributable to Cummins | $428 million; diluted EPS $2.16 | $755 million; diluted EPS $3.84 |
| Cash from operations | $1.137 billion | $987 million |
| Capital expenditures | $310 million | $543 million |
| Cash and cash equivalents at year-end | $930 million | $426 million |
| Marketable securities at year-end | $190 million | $77 million |
| Total debt at year-end | $704 million | $698 million |
| Working capital / current ratio | $2.571 billion / 2.06 | $2.074 billion / 1.79 |
Cash from operations less capital expenditures was $827 million in 2009, versus $444 million in 2008. Inventory fell 25% year over year, while days’ sales outstanding increased to 64 from 48. The company reported $1.065 billion available under its revolving facility, plus $154 million under its receivables program and $229 million under other credit facilities. The revolving facility was undrawn at year-end.
In Q4 2009, sales were $3.400 billion and net income attributable to Cummins was $270 million, compared with $3.288 billion and $43 million, respectively, in Q4 2008. Management cited a temporary pre-buy of engines and components ahead of the January 2010 emissions-standard change.
Material changes versus 2008
- Sales declined 25%; net income attributable to Cummins fell 43%, and diluted EPS declined 44%.
- Sales fell in every segment: Engine 27%, Power Generation 31%, Components 25% and Distribution 18% (segment sales before eliminations). Engine industrial sales were down 40% and on-highway sales down 16%.
- Segment EBIT was $252 million for Engine (down 53%), $167 million for Power Generation (down 56%), $95 million for Components (down 44%) and $235 million for Distribution (down 3%). Distribution’s EBIT margin rose to 13.2% from 11.2%, supported in part by investee income.
- Lower volumes reduced gross margin by $1.228 billion; higher pricing and lower production costs partly offset the decline. Warranty provision was 3.3% of sales versus 2.9% in 2008.
- Equity, royalty and interest income from investees declined 15% to $214 million. The company’s share of equity-investee net income was $196 million, down from $231 million.
- Cash and marketable securities increased by more than $600 million, helped by inventory reduction, restrained capital spending and lower share repurchases. Total debt was broadly stable, while debt as a percentage of total capital declined to 14.9% from 16.7%.
Outlook, risks and unusual items
- Management expected weak North American on-highway sales of EPA 2010-compliant engines and components in the first half of 2010, following the pre-buy. It expected most other markets to remain near then-current levels, with improvement in emerging markets; those markets were expected to have sales comparable to 2008 levels.
- Management expected positive operating cash flow in 2010 and approximately $400 million of capital expenditures. Planned 2010 pension contributions were $175–$185 million; the company reported pension plans underfunded by $522 million at year-end.
- 2009 restructuring and other charges totaled $99 million, including $85 million of restructuring charges and a $14 million pension/postretirement curtailment loss. Approximately 4,200 employees were affected; management estimated about $50 million in annualized savings from professional workforce actions.
- A $12 million flood-damage recovery gain was recorded in 2009. Cummins had submitted a $237 million insurance claim for 2008 flood damage; insurers disputed aspects of the claim and both sides had filed suit.
- Key risks include a renewed economic downturn, successful launch and reliability of new EPA-compliant engines, emissions regulation and compliance costs, dependence on single-source suppliers (70–80% of part types), warranty and product-liability exposure, commodity and currency volatility, and pension funding needs.
- The company had capitalized $216 million for a light-duty diesel engine platform. Management found the investment recoverable at year-end, but warned that weaker customer programs or projected volumes could require an impairment. Cummins also identified substantial dependence on income from unconsolidated investees it does not control.
- Other contingencies include ordinary-course litigation and environmental matters. Cummins stated it did not believe pending lawsuits were material individually or collectively, while noting final outcomes could still adversely affect results.
Important facts for investors to verify
- Whether the Q4 2009 pre-buy pulled sales forward and how demand developed after EPA 2010 standards took effect.
- Actual 2010 segment sales, margins and restructuring savings versus management’s outlook and estimates.
- Warranty claims and costs for newer engine platforms, and any recall or reliability developments.
- Receivables collection trends, liquidity availability and the sustainability of cash generation after inventory reductions.
- Pension funding requirements and asset returns, plus progress on the disputed $237 million flood-insurance claim.
- Performance of key equity investees and the light-duty diesel program’s customer commitments and recoverability.