Cummins Inc. — Q3 2010 Form 10-Q
Business context and period. Cummins designs, manufactures, distributes and services engines, power-generation systems and related components. This unaudited filing covers the 13 weeks ended September 26, 2010, and the nine months ended that date; comparisons are with the periods ended September 27, 2009.
Financial highlights
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $3.401 billion | $2.530 billion | $9.087 billion | $7.400 billion |
| Gross margin | $830 million; 24.4% | $503 million; 19.9% | $2.184 billion; 24.0% | $1.396 billion; 18.9% |
| Operating income | $435 million | $147 million | $1.077 billion | $297 million |
| Net income attributable to Cummins | $283 million | $95 million | $678 million | $158 million |
| Diluted EPS | $1.44 | $0.48 | $3.43 | $0.80 |
| Operating cash flow | — | — | $619 million | $730 million |
- Sales increased 34% in Q3 and 23% year to date. Gross margin rose 4.5 and 5.1 percentage points, respectively.
- Growth reflected stronger emerging-market demand and improving developed markets, price gains, lower warranty expense and higher equity income. SG&A and R&D expenses also increased.
- All segments reported higher sales. Engine sales rose 44% in Q3, although heavy-duty truck sales fell 20%; Power Generation, Components and Distribution sales increased 44%, 30% and 36%, respectively. Distribution growth included the CWC acquisition.
- Operating cash flow fell year over year despite higher earnings, chiefly reflecting increased inventory and receivables and higher equity income net of dividends. Capital expenditures were $170 million; operating cash flow less capital expenditures was approximately $449 million.
Balance sheet, debt and liquidity
- At September 26, cash and cash equivalents were $937 million and marketable securities were $308 million. Working capital was $2.907 billion; the current ratio was 1.95.
- Management reported total debt of $853 million and debt to total capital of 16.0%, versus 14.9% at year-end 2009. The filing’s balance-sheet debt line items do not appear to reconcile directly to the MD&A total; investors should verify the debt calculation.
- Liquidity included a $1.24 billion revolving facility, with $1.21 billion available, plus $205 million available under other credit facilities and $115 million under the receivables program. No receivables-program advances were outstanding. The company was in compliance with credit covenants.
- The board raised the quarterly dividend 50% to $0.2625 per share. Cummins repurchased $241 million of stock during the first nine months of 2010.
Outlook, commentary and notable risks
- Management expected demand to improve through the remainder of 2010, including sequential improvement in fourth-quarter North American heavy-duty engine sales, and expected strong emerging-market demand and organic revenue growth. It also expected strong operating cash flow. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Planned 2010 capital expenditures were approximately $375–$400 million. Management anticipated approximately $220 million of defined-benefit pension contributions and $53 million of other postretirement claims and premiums for 2010.
- Q3 results included a $32 million pretax ($21 million after-tax) recovery of Brazilian taxes overpaid on imported products during 2004–2008. The benefit was recorded in cost of sales and excluded from segment results. The U.K. tax-rate reduction also led to an approximately $2 million deferred-tax charge; year-to-date tax expense included a $7 million charge related to U.S. health-care legislation.
- Demand remained exposed to cyclical markets, customer credit access, OEM production and inventory changes, emissions regulation, competition, commodity and currency movements, and global economic conditions. North American heavy-duty demand was depressed following pre-buying ahead of 2010 emissions standards.
- Litigation and claims include product, environmental, tax and other matters; management did not consider them material individually or in aggregate but cautioned that outcomes could adversely affect results. A disputed insurance claim for 2008 Indiana flood damage totals $220 million; $92 million had been recovered by September 26, 2010.
Important facts for investors to verify
- Whether revenue, margins and equity-investee income can be sustained as markets recover, especially with North American heavy-duty demand still weak.
- How working-capital investment—particularly inventory, up to $1.910 billion from $1.341 billion at year-end—affects cash conversion and liquidity.
- The reconciliation of management’s $853 million total-debt figure to the balance-sheet debt amounts and related debt disclosures.
- The recurring versus one-time contribution to earnings, including the Brazilian tax recovery and the absence of prior-year restructuring charges.
- The eventual recovery from the disputed flood-insurance claim and developments in litigation, warranties and other contingencies.