Cummins Inc. — Q1 2010 Form 10-Q
Business context and period. Cummins designs, manufactures, distributes and services engines, power-generation systems and related components. This unaudited report covers the 13 weeks ended March 28, 2010; comparable period ended March 29, 2009. Amounts below are in U.S. dollars unless noted.
Financial results and liquidity
- Sales: $2.478 billion, up 2% from $2.439 billion. International sales were 64% of total, versus 52% a year earlier.
- Profit and margins: Gross margin was $601 million (24.3% of sales), versus $445 million (18.2%). Operating income was $246 million, versus $29 million. Net income attributable to Cummins was $149 million, or $0.75 per diluted share, versus $7 million, or $0.04.
- Cash flow: Operating cash flow was $126 million, versus $76 million. Investing cash outflow was $144 million and financing cash outflow was $7 million. Cash and cash equivalents ended the quarter at $885 million, down $45 million from year-end.
- Balance sheet and liquidity: Total debt was $758 million, versus $704 million at December 31, 2009; debt was 15.8% of total capital, versus 14.9%. Current assets were $4.920 billion and current liabilities $2.486 billion; working capital was $2.434 billion and the current ratio was 1.98. Management reported $1.07 billion available under its revolving credit facility, $266 million under other credit facilities and $59 million under its receivables sales program.
- Other notable metrics: Cash dividends declared were $0.175 per share, unchanged year over year. Inventory increased $208 million from year-end to $1.549 billion. The company contributed $117 million to defined benefit and other postretirement plans during the quarter.
Changes versus the prior-year quarter
- Profitability improved sharply despite modest sales growth. Management attributed the gross-margin improvement to lower warranty, production and material costs, pricing, currency effects and efficiencies from prior restructuring; lower volumes partly offset these benefits.
- Equity, royalty and interest income from investees increased to $76 million from $33 million, including stronger earnings from certain emerging-market joint ventures.
- No restructuring charge was recorded in Q1 2010, compared with $66 million in Q1 2009. The company said terminations under the 2009 restructuring plan were substantially complete; $8 million remained accrued at quarter-end.
- Segment trends varied: Engine sales fell 5% and Power Generation sales fell 21%; Components sales rose 19% and Distribution sales rose 15%. Distribution’s increase included the Cummins Western Canada acquisition.
- Q1 2010 results included a $12 million gain from remeasuring Cummins’ pre-existing interest in Cummins Western Canada upon acquiring the remaining 70% interest. The acquisition cost $71 million in consideration.
Outlook, commentary and risks
- Management expected demand to improve through 2010 in most markets, with emerging markets remaining strong. It expected North American heavy-duty on-highway engine sales to remain weak through Q2 and begin improving in the second half, following pre-2010 emissions-standard purchasing.
- Management expected margins to remain strong during 2010, while cautioning that product mix, higher warranty costs for new product launches and commodity costs could pressure margins. It expected positive operating cash flow for 2010 and planned approximately $400 million of capital expenditures.
- Management anticipated approximately $170 million of 2010 defined benefit pension contributions and approximately $53 million of other postretirement-benefit claims and premiums. The expected full-year effective tax rate was approximately 31%, excluding discrete items; Q1’s 34% rate included a $7 million discrete charge related to U.S. health-care legislation.
- Key risks include cyclical demand, customer access to credit, emissions regulation and product launches, competition, commodity and currency movements, reliance on major customers, and litigation or environmental matters. Management cited possible tightening of credit in China and India.
- The company had a $237 million insurance claim related to 2008 Southern Indiana flood damage and had received $91 million by quarter-end. Insurers disputed aspects of the claim, and litigation was ongoing; recovery of the claimed amount was not assured. The filing also describes ordinary-course lawsuits and environmental exposures, which management did not believe were material individually or in aggregate, while noting outcomes could adversely affect results.
- Other disclosed commitments include up to $108 million of maximum potential loss under certain guarantees, $8 million of residual-value guarantees, and approximately $69 million of potential supplier-contract penalties if purchases ceased; management did not expect to pay those penalties.
Most important facts for investors to verify
- Whether the strong year-over-year margin and earnings improvement persists without the prior-year restructuring comparison and the $12 million acquisition-related gain.
- Whether North American heavy-duty demand recovers as expected in the second half of 2010, and whether emerging-market demand and credit conditions support the outlook.
- Whether inventory growth, pension contributions and working-capital movements affect cash generation and the stated expectation of positive 2010 operating cash flow.
- Progress and outcome of the disputed flood-insurance claim, and developments in material litigation or environmental matters.
- Whether new-product warranty costs, product mix and commodity prices put pressure on margins, and whether planned capital spending and pension funding remain on track.