Cummins Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2020; comparisons are with the periods ended June 30, 2019. Amounts are in millions of dollars, except per-share data and percentages. Cummins designs, manufactures, distributes and services powertrains and related products worldwide.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $3,852 | $6,221 | $8,863 | $12,225 |
| Gross margin | $890; 23.1% | $1,641; 26.4% | $2,184; 24.6% | $3,173; 26.0% |
| Operating income | $336 | $848 | $970 | $1,647 |
| Net income attributable to Cummins | $276 | $675 | $787 | $1,338 |
| Diluted EPS | $1.86 | $4.27 | $5.29 | $8.47 |
| Operating cash flow | $(22) for quarter | Not stated in the filing text | $357 | $1,220 |
Quarterly sales fell 38%, operating income 60%, and attributable net income 59%. First-half sales declined 28% and attributable net income 41%. Lower volumes drove weaker gross margin; cost reductions and lower warranty expense partly offset the impact. First-half EPS also benefited $0.09 from fewer weighted-average shares after repurchases.
For the second quarter, external sales declined across major segments: Engine $937 (55% lower), Distribution $1,601 (21% lower), Components $876 (37% lower), and Power Systems $428 (41% lower). New Power sales were $10. Distribution segment EBITDA decreased only 7%, to $160; total segment EBITDA was $504 versus $1,025 a year earlier. EBITDA is a non-GAAP segment measure.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1,751 and marketable securities $353 at June 28, 2020, totaling $2,104; year-end 2019 total was $1,470.
- Total debt was $3,841, up from $2,367 at year-end, including $2,027 of commercial paper. Debt-to-total-capital rose to 32.1% from 21.9%.
- Working capital was $2,918, down from $3,127; current ratio was 1.42 versus 1.50.
- Committed revolving credit facilities totaled $5.5 billion; outstanding commercial paper reduced available revolving capacity to approximately $3.5 billion. A further $189 was available under international and other domestic facilities. Cummins also had $230 of commercial paper outstanding under the Federal Reserve’s Commercial Paper Funding Facility.
- First-half investing cash outflow was $234; financing cash inflow was $460, principally reflecting $1,367 of net commercial-paper borrowings. Cummins paid $388 in dividends and repurchased $550 of shares, all in the first quarter.
Outlook, commentary and risks
- Management expected significantly weaker demand in most markets for the remainder of 2020 and said the pandemic’s duration and financial effects could not be estimated. No specific full-year revenue or earnings forecast is provided in the filing text.
- Management reduced planned 2020 capital expenditures to $500–$525, excluding internal-use software, and expected $50–$60 of software spending. It cited expected annualized savings of approximately $250–$300 from restructuring and other actions.
- A tiered payroll reduction was scheduled to end after September 30, 2020; share repurchases were suspended in Q2. In July, the board maintained the third-quarter dividend at $1.311 per share.
- Customer shutdowns, supply-chain disruption, reduced operating capacity, and renewed facility closures could further affect demand, production, costs and cash flow. All manufacturing and distribution facilities had reopened by quarter-end, though some operated below capacity.
- A formal review of emissions certification and compliance for pickup-truck applications remained ongoing with EPA and CARB, with DOJ and SEC inquiries. Regulators had raised concerns about possible defeat devices; the company said the outcome and financial impact could not be predicted.
- Other significant exposures include product warranty and campaign costs, litigation and environmental claims, foreign-exchange and pension-market volatility, and reliance on investees. The remaining accrual for the pre-2013 engine-system emissions campaign was $184 at quarter-end.
Important facts for investors to verify
- Whether demand, customer production and supplier availability recover as management anticipated, and the resulting effect on margins and operating cash flow.
- Developments and potential costs from the emissions-certification review and related regulatory and government inquiries.
- Commercial-paper maturities, available credit capacity, and changes in debt and liquidity needs.
- Whether restructuring savings and reduced capital spending are achieved without impairing operations or growth investment.
- Changes in warranty, campaign, legal and other contingent liabilities; the filing does not quantify a final emissions-review exposure.