Cummins Inc. Q2 2013 Financial Summary
Business Context and Reporting Period
This Form 8-K, filed on July 30, 2013, reports the unaudited financial results for Cummins Inc. for the second quarter and first six months ended June 30, 2013. The company operates through four primary segments: Engine, Components, Power Generation, and Distribution.
Key Financial Metrics
| Metric (in millions) | Q2 2013 | Q2 2012 | YTD 2013 | YTD 2012 |
|---|---|---|---|---|
| Net Sales | $4,525 | $4,452 | $8,447 | $8,924 |
| Gross Margin | $1,153 | $1,210 | $2,110 | $2,408 |
| Operating Income | $610 | $648 | $1,024 | $1,296 |
| Net Income (Cummins Inc.) | $414 | $469 | $696 | $924 |
| Diluted EPS | $2.20 | $2.47 | $3.69 | $4.85 |
| Cash from Operations (YTD) | $960 (vs. $397 YTD 2012) | |||
| Cash & Equivalents (End of Period) | $1,382 | |||
| Total Debt (Current + Long-term) | $797 (vs. $759 Dec 31, 2012) |
Material Changes vs. Prior Period
- Revenue: Q2 2013 net sales increased 1.6% year-over-year to $4.525 billion, driven by volume growth in the Engine and Distribution segments, partially offset by unfavorable foreign currency impacts. YTD sales declined 5.3%.
- Profitability: Q2 Net Income attributable to Cummins Inc. decreased 11.7% to $414 million. YTD Net Income decreased 24.7% to $696 million. The decline is attributed to lower sales volumes in the first half of the year and higher effective tax rates.
- Cash Flow: Net cash provided by operating activities for the first six months of 2013 was $960 million, a significant increase from $397 million in the prior year period, primarily due to improved working capital management.
- Segment Performance: The Engine segment saw a 12.8% EBIT margin in Q2 2013 compared to 13.2% in Q2 2012. The Distribution segment EBIT included $5 million in gains from fair value adjustments related to recent acquisitions.
Outlook, Risks, and Unusual Items
- Acquisitions: In May 2013, Cummins acquired the remaining 67% interest in Cummins Rocky Mountain LLC for approximately $136 million. In January 2013, it acquired an additional 50% interest in Cummins Northwest LLC. These transactions resulted in fair value adjustment gains of $5 million and $7 million, respectively, included in the Distribution segment results.
- Tax Matters: The effective tax rate for the six months ended June 30, 2013, was 27.9%. This includes a discrete tax benefit of $28 million related to the reinstatement of the research credit and a discrete expense of $17 million for the write-off of a deferred tax asset. Management expects the full-year effective tax rate to approximate 29.1%.
- Capital Allocation: The company repurchased $289 million of common stock and paid $189 million in dividends during the first six months of 2013.
- Risks: The filing notes exposure to foreign currency fluctuations and the impact of global economic conditions on demand for heavy-duty engines and power generation products.
Investor Verification Checklist
- Verify the sustainability of the Q2 sales growth given the YTD decline of 5.3%.
- Confirm the impact of the $17 million deferred tax asset write-off on future tax provisions.
- Review the integration progress and incremental revenue contribution from the Cummins Rocky Mountain and Northwest acquisitions.
- Monitor the trend in working capital, specifically the $265 million increase in accounts receivable and $184 million increase in inventory during the first half of 2013.
- Assess the company's ability to maintain the 29.1% full-year effective tax rate estimate amidst changing global tax jurisdictions.