Cummins Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars.
Business context
Cummins designs, manufactures, distributes and services diesel, natural-gas, electric and hybrid powertrains and related components and power systems. Its five segments are Engine, Distribution, Components, Power Systems and New Power. The company serves customers in more than 190 countries through a global distributor and dealer network. PACCAR was its largest customer, representing 17% of 2019 sales; four major truck customers together represented 37%.
Financial results and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $23.571 billion | $23.771 billion | Down 1% |
| Gross margin | $5.980 billion; 25.4% of sales | $5.737 billion; 24.1% | Up $243 million; margin up 1.3 points |
| Operating income | $2.700 billion | $2.786 billion | Down 3% |
| Net income attributable to Cummins | $2.260 billion | $2.141 billion | Up 6% |
| Diluted EPS | $14.48 | $13.15 | Up 10% |
| Operating cash flow | $3.181 billion | $2.378 billion | Up $803 million |
| Total debt | $2.367 billion | $2.476 billion | Down $109 million |
| Cash and marketable securities | $1.470 billion | $1.525 billion | Down $55 million |
| Working capital / current ratio | $3.127 billion / 1.50 | $3.434 billion / 1.54 | Both lower |
Capital expenditures were $775 million, including internal-use software spending. The debt-to-capital ratio was 21.9%, down from 23.1%. The company reported $2.840 billion of available revolving credit capacity after commercial paper borrowings. It paid $761 million in dividends and repurchased $1.271 billion of shares during 2019.
Fourth-quarter 2019 sales were $5.578 billion, gross margin was $1.313 billion, net income attributable to Cummins was $300 million, and diluted EPS was $1.97. Fourth-quarter results included a $119 million restructuring charge ($90 million after tax).
Material changes and segment performance
- Sales declined as growth in Distribution and New Power was outweighed by lower Engine, Components and Power Systems sales. International sales fell 6%; U.S. and Canadian sales rose 3%.
- Distribution sales increased 3% to $8.071 billion and segment EBITDA rose 17% to $656 million, supported especially by North American power-generation demand.
- Engine sales fell 5% to $10.056 billion; segment EBITDA increased 1% to $1.454 billion. Total engine unit shipments declined 9%.
- Components sales fell 4% to $6.914 billion, while segment EBITDA rose 7% to $1.097 billion. Power Systems sales fell 4% to $4.460 billion and EBITDA fell 17% to $512 million.
- New Power, which includes electrification, fuel-cell and hydrogen technologies, recorded $38 million of sales and a $149 million segment EBITDA loss. Cummins acquired an 81% interest in Hydrogenics for $235 million in September 2019.
- Gross-margin improvement primarily reflected the absence of a $368 million engine-system campaign charge recorded in 2018, favorable pricing and lower material costs; lower volumes, tariffs and foreign exchange partly offset these benefits. Equity, royalty and interest income from investees declined to $330 million from $394 million.
Outlook, management commentary and risks
- Management expected 2020 weakness in North American truck and pickup demand, power generation, construction markets in North America, China and Europe, India, Chinese truck markets, mining and North American oil and gas. No consolidated 2020 revenue or earnings forecast is provided in the cited outlook.
- Cost reductions and restructuring were expected to generate annualized savings of approximately $250 million to $300 million. The 2019 actions affected about 2,300 employees; approximately $116 million of related cash payments were expected in 2020. Further facility closures or restructuring could add charges.
- The company was conducting an internal review of emissions certification and compliance for pickup-truck applications after EPA and CARB questions concerning 2019 RAM 2500/3500 engines. DOJ and SEC inquiries were ongoing; a revised engine calibration had been included in engines shipped since September 2019. Cummins said the financial impact could not yet be estimated and could be material.
- In late January 2020, several facilities in Hubei, China, were closed amid the coronavirus outbreak. The duration and financial impact were unknown; the facilities support Chinese operations and supply components to other regions.
- Other significant risks include cyclical markets, customer and supplier concentration, emissions regulation, recalls and warranty claims, foreign exchange and commodity volatility, trade restrictions, and reliance on unconsolidated investees—many of which are in China. The accrued product-warranty liability was $1.448 billion; the remaining accrual for the 2018 engine-system campaign was $247 million.
- Management reported strong liquidity and covenant compliance. Independent auditors issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded internal controls were effective at year-end.
Key facts for investors to verify
- Developments, potential remediation costs and timing of the emissions review and related EPA, CARB, DOJ and SEC processes.
- Actual 2020 market conditions, China-related disruption, and whether the stated restructuring savings are achieved without significant additional charges.
- Warranty and campaign claims relative to recorded accruals, including the remaining $247 million engine-system campaign balance.
- Performance and impairment assumptions for the Eaton Cummins automated-transmission business; its reporting-unit fair value exceeded carrying value by about 34% in 2019.
- Cash generation, working-capital trends, capital returns and debt/liquidity needs as sales and production adjust to weaker demand.