Cummins Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013; each period comprised 13 and 26 weeks, respectively. Cummins designs, manufactures, distributes and services engines, engine components and power-generation systems worldwide.
Financial performance
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Net sales | $4.525 billion; up 2% year over year | $8.447 billion; down 5% |
| Gross margin | $1.153 billion; 25.5% of sales, versus 27.2% | $2.110 billion; 25.0% of sales, versus 27.0% |
| Operating income | $610 million, down 6% | $1.024 billion, down 21% |
| Net income attributable to Cummins | $414 million; diluted EPS $2.20 | $696 million; diluted EPS $3.69 |
| Operating cash flow | Not separately stated in the supplied filing text | $960 million, versus $397 million |
Six-month results weakened primarily because of lower sales volumes and unfavorable product mix, which reduced gross margin, along with a higher effective tax rate and lower investee income. Lower selling, general and administrative and research expenses partly offset the declines. Q2 sales growth was supported by Components and Distribution, while Engine and Power Generation sales declined. Q2 earnings also faced lower gross margin and higher taxes; price realization and lower SG&A provided partial offsets.
- Segments, Q2: Engine sales $2.656 billion (down 7%) and EBIT $339 million (down 10%); Components sales $1.117 billion (up 8%) and EBIT $136 million (up 17%); Power Generation sales $814 million (down 10%) and EBIT $76 million (down 19%); Distribution sales $954 million (up 20%) and EBIT $100 million (up 9%). Distribution growth included acquired distributors.
- Cash flow and investment: Six-month operating cash flow was $960 million. Working-capital cash outflow was $12 million, compared with $714 million in the prior-year period; the company cited lower tax payments, higher accounts payable and a smaller inventory increase. Investing cash outflow was $411 million, including $275 million of capital expenditures and $134 million for acquisitions. Financing cash outflow was $473 million, including $289 million of share repurchases and $189 million of dividends.
- Liquidity and debt: Cash and marketable securities totaled $1.587 billion at June 30. Total debt was $837 million, versus $775 million at year-end 2012; debt-to-capital was 10.6%, versus 10.0%. The current ratio was 2.14 and working capital was $3.942 billion. The company reported $1.7 billion available under its revolving facility and $299 million under other credit facilities.
Changes, outlook and notable items
- Worldwide revenue fell 5% in the first half. Management attributed weakness to reduced demand in heavy-duty trucks, mining, oil and gas, construction and power generation, partly offset by distributor acquisitions and strength in selected medium-duty markets.
- Management said demand began improving in Q2, led by emission solutions and North American medium-duty market-share gains. For the remainder of 2013, it expected those gains to continue, many North American markets to remain steady, and global construction to improve. Risks to that outlook included sluggish European demand, currency volatility, weak North American oil and gas, potentially weaker mining markets, declining Indian on-highway demand and soft international power-generation demand.
- Management expected 2013 capital expenditures of approximately $750–$800 million and an effective tax rate of approximately 29.1%, excluding one-time items. It expected about $170 million of pension contributions for 2013, including approximately $49 million in the second half. No full-year revenue or earnings forecast is provided in the supplied text.
- In July 2013, the board authorized a 25% quarterly dividend increase, from $0.50 to $0.625 per share. The 2011 $1 billion repurchase authorization was completed in June; a further $1 billion authorization had $937 million remaining at quarter-end.
- Acquisitions of controlling interests in Cummins Northwest and Cummins Rocky Mountain brought the distributors into the consolidated results and generated fair-value remeasurement gains of $7 million and $5 million, respectively. The Rocky Mountain acquisition included approximately $136 million of purchase consideration, including debt repayment.
- Warranty liability was $1.123 billion at June 30. The company described ordinary-course litigation and environmental matters, including potential responsibility at waste-disposal sites, but said it did not believe pending lawsuits were material individually or in aggregate; it cautioned that final outcomes could adversely affect results or cash flows. Supplier minimum-purchase arrangements carried potential penalties of about $118 million if purchases stopped, which management did not anticipate paying. Additional joint-venture commitments were $64 million.
- Other risks highlighted include cyclical and slowing markets, emissions regulation, customer and supplier concentration or distress, commodity and currency movements, product recalls, competition, international operations, litigation, pension performance and new-product execution. Moody’s raised Cummins’ rating to A3 with a stable outlook in April 2013.
Important facts for investors to verify
- Whether market recovery and North American medium-duty share gains materialized, and whether weakness in mining, oil and gas, Europe and power generation persisted.
- How much of Distribution and Components growth came from acquisitions versus underlying demand, and the effect on segment margins.
- Whether operating cash flow remains strong after the first-half working-capital benefit and tax refund effects.
- Progress against the $750–$800 million capital-spending plan, expected pension funding and the increased dividend.
- Developments in warranty costs, litigation and environmental contingencies, supplier commitments, and the remaining share-repurchase authorization.