Cummins Inc. Q2 2014 Financial Summary
Business Context and Reporting Period
This Form 8-K, filed on July 28, 2014, reports the unaudited financial results for Cummins Inc. for the second quarter ended June 29, 2014, and the first six months of 2014. The company operates through four primary segments: Engine, Components, Power Generation, and Distribution.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | YTD 2014 | YTD 2013 |
|---|---|---|---|---|
| Net Sales | $4,835M | $4,525M | $9,241M | $8,447M |
| Gross Margin | $1,227M (25.4%) | $1,153M (25.5%) | $2,343M (25.4%) | $2,110M (25.0%) |
| Operating Income | $612M | $610M | $1,125M | $1,024M |
| Net Income (Cummins Inc.) | $446M | $414M | $784M | $696M |
| Diluted EPS | $2.43 | $2.20 | $4.26 | $3.69 |
| EBIT Margin | 13.6% | 13.7% | 12.8% | 12.5% |
| Cash & Equivalents | $2,219M | N/A | N/A | N/A |
| Long-Term Debt | $1,627M | N/A | N/A | N/A |
Cash Flow (Six Months Ended June 29, 2014): Net cash provided by operating activities was $701 million. Net cash used in investing activities was $463 million, and net cash used in financing activities was $756 million, driven primarily by $430 million in stock repurchases and $229 million in dividend payments.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 6.9% year-over-year in Q2 and 9.4% year-over-year for the first six months, driven by higher unit volumes and favorable foreign currency translation.
- Profitability: Net income attributable to Cummins Inc. rose 7.7% in Q2 and 12.6% YTD compared to the prior year periods.
- Segment Performance:
- Engine: Sales increased due to growth in heavy-duty truck and industrial markets.
- Components: Sales grew significantly, particularly in Emission Solutions.
- Power Generation: Sales declined year-over-year in Q2 due to lower power products and systems sales.
- Distribution: Sales increased, aided by the acquisition of Cummins Southern Plains LLC.
- Acquisition Impact: The acquisition of the remaining 50% interest in Cummins Southern Plains LLC resulted in a $13 million gain in the Distribution segment for Q2 2014.
Guidance, Outlook, and Risks
Tax Rate: The effective tax rate for the year is expected to approximate 28%, excluding one-time items. The Q2 rate was 26.5%, benefiting from a $2 million discrete tax benefit related to state audit settlements. The YTD rate was 28%.
Dividends: Cash dividends declared per common share were $0.625 for Q2 2014, an increase from $0.50 in Q2 2013.
Capital Allocation: The company repurchased $430 million of common stock during the first six months of 2014.
Risks and Contingencies: The filing notes that the research tax credit expired on December 31, 2013, and had not been renewed by Congress at the time of filing, which impacts the effective tax rate calculation. The company also faces standard risks related to foreign currency fluctuations and global economic conditions affecting demand for engines and components.
Investor Verification Checklist
- Verify the impact of the expired research tax credit on future effective tax rates.
- Confirm the sustainability of the 6.9% Q2 sales growth given the decline in the Power Generation segment.
- Review the integration progress and financial contribution of the Cummins Southern Plains LLC acquisition.
- Monitor the company's cash burn rate relative to its $2.2 billion cash balance given the aggressive $430 million stock buyback program in H1 2014.
- Assess the exposure to foreign currency translation effects on reported earnings.