Cummins Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Cummins designs, manufactures, distributes and services powertrains, components, power systems and electrification and hydrogen products worldwide. Figures below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $8,638 | $6,586 | $17,091 | $12,971 |
| Gross margin | $2,148; 24.9% | $1,726; 26.2% | $4,177; 24.4% | $3,258; 25.1% |
| Operating income | $997 | $897 | $2,023 | $1,501 |
| Net income attributable to Cummins | $720 | $702 | $1,510 | $1,120 |
| Diluted EPS | $5.05 | $4.94 | $10.60 | $7.86 |
- Revenue rose 31% in Q2 and 32% in the first half. Cummins attributed growth principally to Meritor-related axles and brakes sales and stronger demand across segments and regions.
- Q2 operating income increased 11% and diluted EPS increased 2%; first-half operating income increased 35% and diluted EPS increased 35%. Higher sales, volume and pricing supported results, while compensation costs, interest expense and acquisition-related amortization were headwinds.
- Gross margin percentage declined year over year: 1.3 percentage points in Q2 and 0.7 points in the first half. Management cited Meritor’s lower gross-margin profile and, for Q2, the absence of prior-year Russian inventory recoveries.
- Q2 segment EBITDA: Components $486, Engine $425, Distribution $299, Power Systems $201 and Accelera loss of $114. Components and Power Systems gains reflected volume and pricing; Accelera remained loss-making as it develops and commercializes newer technologies.
Cash flow, debt and liquidity
- First-half operating cash flow was $978, up from $763. Working capital consumed $849 of cash, compared with $670 in the prior-year period; receivables and inventory increased.
- Cash and cash equivalents were $1,802 at June 30, versus $2,101 at year-end; marketable securities were $512. Combined cash and securities totaled $2,314. Cash declined $299 during the half.
- Total debt was $7,700, compared with $7,855 at year-end; debt to total capital was 40.4%, down from 44.1%. Commercial paper outstanding was $1,617, with a weighted-average rate of 5.14%.
- Cummins had $2,383 available under its revolving facilities after commercial paper borrowings and a further $221 available under international and other domestic facilities. Management said liquidity remained strong and expected to emphasize debt repayment in 2023.
- First-half capital expenditures were $414. The company expects 2023 capital expenditures of $1.2–$1.3 billion. It paid $445 in common dividends during the half; in July, the quarterly dividend was increased approximately 7%, from $1.57 to $1.68 per share.
Material changes and notable transactions
- Meritor, acquired in 2022, contributed substantial incremental Components sales, including $1.2 billion of axles and brakes sales in Q2 and $2.5 billion in the first half. Its acquisition also increased intangible amortization and borrowing costs.
- Atmus Filtration Technologies completed an IPO in May. Cummins exchanged 19.5% of its ownership and retained 80.5%, continuing to consolidate Atmus. Atmus borrowed $600 million under a term loan and $50 million under a revolver; Cummins said transaction proceeds were intended for historical debt retirement, dividends and share repurchases. A tax-free split-off remains planned, subject to market conditions.
- Cummins agreed to acquire the remaining 19% interest in Hydrogenics for $335 million, including settlement of shareholder loans; $175 million was paid July 31, with the remaining $160 million due in installments through 2025. It also acquired Teksid MX for approximately $150 million and agreed to buy Faurecia’s U.S. and Europe commercial vehicle exhaust business for approximately €142 million, with closing expected in Q4.
- Interest expense rose to $99 in Q2 from $34 and to $186 in the first half from $51, primarily because of higher floating rates, short-term borrowings and new term-loan borrowings.
Outlook, risks and contingencies
- Management expected strong North American truck demand, continued strength in India, power generation and other Power Systems markets, and robust aftermarket demand; it expected China truck demand to improve from 2022 levels. The filing does not provide a consolidated full-year revenue or EPS forecast.
- Risks to the outlook include ongoing component shortages and supply-chain constraints, inflation in materials and labor, higher interest rates, incremental Atmus separation costs and acquisition-related debt and amortization.
- Cummins is working with the EPA and CARB on emissions certification matters involving pickup-truck applications, including recalls for 2013–2018 RAM 2500/3500 and 2016–2019 Nissan Titan vehicles. The company had accrued $30 million for the RAM recall and $29 million for the Titan recall, but said potential additional impacts, including possible consent decrees and civil penalties, could be material and could not yet be reasonably estimated.
- Operations in Russia remain indefinitely suspended. No material additional suspension costs were recorded in the first half of 2023; the company continued to seek approvals to exit its KAMAZ joint venture.
- Other exposures include ordinary-course litigation, environmental remediation sites, supplier minimum-purchase commitments and guarantees. Management said it did not believe pending lawsuits were material individually or in aggregate, while noting that final outcomes could adversely affect results or cash flows.
Important facts for investors to verify
- Whether gross-margin pressure, supply constraints and elevated compensation and financing costs persist as 2023 progresses.
- The timing, economics and tax treatment of the planned Atmus split-off, and the intended use of proceeds and debt reductions.
- The final costs and regulatory resolution of the EPA/CARB emissions matters and related recalls.
- Execution and financing of the Faurecia exhaust-business acquisition and scheduled Hydrogenics payments.
- Debt maturities, commercial-paper refinancing capacity and the impact of interest rates on financing costs and liquidity.