Cummins Inc. — FY2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter filing; the filing also reports fourth-quarter results. Cummins designs, manufactures, distributes and services engines, engine components and power-generation systems worldwide through four segments: Engine, Components, Power Generation and Distribution.
Key financial results
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $18.048 billion | $13.226 billion | +36% |
| Gross margin | $4.589 billion; 25.4% of sales | $3.168 billion; 24.0% | +45%; +1.4 percentage points |
| Operating income | $2.681 billion | $1.602 billion | +67% |
| Net income attributable to Cummins | $1.848 billion | $1.040 billion | +78% |
| Diluted EPS | $9.55 | $5.28 | +81% |
| Cash from operations | $2.073 billion | $1.006 billion | More than doubled |
Fourth-quarter sales were $4.921 billion versus $4.139 billion in Q4 2010; attributable net income was $548 million versus $362 million, and diluted EPS was $2.86 versus $1.84. FY2011 gross-margin improvement reflected higher volume, better pricing, product mix and currency, partly offset by material and commodity costs and warranty costs.
Segment sales and EBIT: Engine $11.307 billion and $1.384 billion; Components $4.063 billion and $470 million; Power Generation $3.498 billion and $373 million; Distribution $3.044 billion and $386 million. Segment sales include intersegment sales, so they do not sum to consolidated sales. Engine sales rose 43% and EBIT 71%, led by North American truck recovery and industrial demand. All segments reported higher sales and EBIT.
Cash, debt and capital allocation
Year-end cash and cash equivalents were $1.484 billion, with $277 million of marketable securities. Total debt was $783 million, down from $843 million; the debt-to-capital ratio fell to 11.8% from 14.4%. The current ratio was 1.94 and working capital was $3.434 billion. Cummins reported $1.203 billion available under its revolving facility, $300 million under other credit facilities and $209 million under its receivables program; no revolver borrowings or receivables-program advances were outstanding. Credit-facility leverage and interest-coverage ratios were 0.26:1 and 53.62:1, respectively, and the company reported covenant compliance.
Capital expenditures were $622 million, compared with $364 million in 2010. Cummins repurchased $629 million of shares and paid $255 million in dividends during 2011; the quarterly dividend was raised 52% to $0.40 per share in Q3. Cash and securities totaled $1.761 billion, but most were held outside the U.S.
Material changes, unusual items and management commentary
- Reported FY2011 earnings included $121 million of divestiture gains ($70 million after tax) from the exhaust and light-duty filtration businesses, plus a $38 million flood-insurance gain ($24 million after tax). These gains were excluded from segment results. The filing attributes the year-over-year earnings increase chiefly to higher volumes and margins, with these gains, lower taxes and higher investee income also contributing.
- The effective tax rate was 27.1%, versus 29.5% in 2010. FY2011 included discrete tax benefits, including $48 million for prior-year research-credit claims, $19 million from releasing certain deferred U.S. tax liabilities and $16 million related to reductions in unrecognized tax benefits. Management expected a 2012 rate of 29% before discrete items, or 28% if the research tax credit were renewed.
- Equity, royalty and interest income from investees increased to $416 million from $351 million. Management cautioned that significant income comes from joint ventures and distributors it does not control.
- R&D expense reported in the income statement was $629 million; net R&D expenditures after contract reimbursements were $621 million, versus $402 million in 2010. Spending increased as Cummins developed products for future emissions rules and fuel economy.
- Cummins sold the exhaust business for $123 million and the light-duty filtration business for $90 million. The company also announced plans to dissolve its Cummins MerCruiser Diesel joint venture and transition to a supply arrangement by mid-2012; it did not expect a significant financial impact.
Outlook and principal risks
Management expected North American on-highway trucks, global oil and gas, and mining to remain strong in 2012; it also anticipated improvement in India power generation and continued growth in parts of Brazil’s power-generation and aftertreatment markets. Challenges included weak industrial demand in China and India early in the year, possible declines in European markets, currency volatility, increased product-development spending and potential Brazilian engine-sales pressure from 2011 pre-buying and a customer’s switch to its own engine. No consolidated 2012 revenue or EPS target is stated in the supplied filing text. Planned 2012 capital expenditures were approximately $800–$850 million, about half outside the U.S.
- Global economic weakness, slower infrastructure spending and cyclical end markets could reduce demand; 59% of 2011 sales were outside the U.S.
- PACCAR accounted for approximately 12% of sales, the only customer above 10%; sales to seven major customers together were about 31%.
- Approximately 60–70% of part types were single-sourced. A supplier interruption could disrupt production; a take-or-pay agreement requires about $73 million of annual purchases from 2012 through 2018.
- Emission-rule changes, product-development execution, EPA 2010 engine performance, recalls and warranty claims could raise costs or impair competitiveness. Cummins had capitalized $221 million for its light-duty diesel platform and warned of possible impairment if expected customer volumes weaken.
- Pension results are sensitive to investment returns and discount rates. Management expected $130 million of pension contributions in 2012; year-end global plans were reported 98% funded.
- The company faces currency, commodity, tax, legal, environmental, labor and joint-venture risks. It reported ordinary-course litigation and environmental remediation matters, but said it did not believe the lawsuits were material individually or in aggregate and that recorded accruals were adequate where estimable.
Important facts for investors to verify
- How much of the 2011 earnings increase is sustainable after excluding divestiture and flood-insurance gains and discrete tax benefits.
- Whether 2012 demand, pricing and margins support the outlook, particularly in North America, China, India, Brazil and Europe.
- The durability of investee earnings and the performance of entities Cummins does not control.
- Exposure to PACCAR and other major customers, single-source suppliers, and the $73 million annual take-or-pay commitment.
- Progress and customer commitments for the light-duty diesel platform, and any resulting impairment risk.
- Pension funding needs, foreign cash accessibility and potential tax consequences of repatriation.