Cummins Inc. Q3 2018 Financial Summary
Business Context and Reporting Period
This Form 8-K, filed on October 30, 2018, reports the unaudited financial results for Cummins Inc. for the third quarter and nine months ended September 30, 2018. The company operates through four primary segments: Engine, Distribution, Components, and Power Systems, with a new Electrified Power segment established effective January 1, 2018.
Key Financial Metrics
| Metric (in millions) | Q3 2018 | Q3 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Net Sales | $5,943 | $5,285 | $17,645 | $14,952 |
| Gross Margin | $1,551 | $1,341 | $4,191 | $3,724 |
| Operating Income | $803 | $622 | $2,055 | $1,748 |
| Net Income (Cummins Inc.) | $692 | $453 | $1,562 | $1,273 |
| Diluted EPS | $4.28 | $2.71 | $9.53 | $7.60 |
| EBITDA | $983 | $788 | $2,580 | $2,257 |
| Cash & Equivalents | $1,222 | N/A | N/A | N/A |
| Long-term Debt | $1,563 | N/A | N/A | N/A |
Note: Balance sheet figures represent period-end values as of September 30, 2018.
Material Changes vs. Prior Period
- Revenue Growth: Q3 Net Sales increased 12.5% year-over-year, driven by higher unit volumes and favorable foreign currency impacts. YTD sales grew 18.0%.
- Profitability Expansion: Q3 Operating Income rose 29.1% to $803 million. Net Income attributable to Cummins Inc. increased 52.8% to $692 million.
- Tax Rate Impact: The effective tax rate for Q3 2018 was 13.3%, significantly lower than the 26.5% in Q3 2017, primarily due to the 2017 Tax Cuts and Jobs Act and favorable discrete tax items ($37 million).
- Share Count Reduction: Weighted average diluted shares outstanding decreased from 167.0 million in Q3 2017 to 161.8 million in Q3 2018, reflecting aggressive share repurchases ($879 million YTD).
- Segment Performance: The Engine segment reported the highest EBITDA ($405 million), followed by Components ($288 million). The new Electrified Power segment reported a loss of $30 million in EBITDA for the quarter.
Guidance, Outlook, and Risks
- Tax Outlook: Management expects the full-year 2018 effective tax rate to approximate 21.0%, excluding discrete items.
- Discrete Items: Q3 included $37 million of favorable net discrete tax items. The nine-month period included $37 million of unfavorable net discrete tax items related to the Tax Legislation.
- Accounting Changes: The company retroactively adopted new accounting standards for pension and other postretirement benefit costs effective January 1, 2018, adjusting prior period balances.
- Unusual Items: The filing notes a $368 million engine system campaign charge in the nine-month EBITDA reconciliation for 2018 (not present in 2017), which was excluded from the "EBITDA excluding engine system campaign charge" metric.
Investor Verification Checklist
- Tax Rate Volatility: Verify the sustainability of the 13.3% Q3 effective tax rate versus the 21.0% full-year guidance and the impact of discrete Tax Legislation items.
- Share Repurchase Impact: Confirm the extent to which EPS growth ($4.28 vs $2.71) is driven by earnings growth versus the reduction in share count (approx. 3% reduction YTD).
- Electrified Power Segment: Monitor the performance of the new Electrified Power segment, which currently shows negative EBITDA ($30 million Q3, $61 million YTD).
- Cash Flow vs. Net Income: Note that YTD operating cash flow ($1,388 million) was lower than YTD net income ($1,577 million), primarily due to increases in receivables ($429 million) and inventories ($773 million).
- Debt Structure: Review the increase in commercial paper borrowings (from $298 million to $800 million) and total debt levels relative to liquidity.