Cummins Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 4, 2021; comparable period ended March 29, 2020. Cummins designs, manufactures, distributes and services powertrains and related components, including diesel, natural gas, electric, hybrid and hydrogen technologies.
Financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $6.092 billion | $5.011 billion | +22% |
| Gross margin | $1.486 billion; 24.4% of sales | $1.294 billion; 25.8% of sales | +15%; margin down 1.4 points |
| Operating income | $810 million | $634 million | +28% |
| Net income attributable to Cummins | $603 million | $511 million | +18% |
| Diluted EPS | $4.07 | $3.41 | +19% |
| Operating cash flow | $339 million | $379 million | Down $40 million |
Sales grew across all segments. Components led growth, with external sales up 55%; Engine sales rose 20%, Power Systems 22%, Distribution 1%, and New Power reported $34 million of external sales versus $10 million. Segment EBITDA was $980 million, up 16%; Components EBITDA increased 51% and Power Systems 64%, while Engine EBITDA declined 3% and New Power’s loss widened to $51 million.
Cash, debt and liquidity
- Cash and cash equivalents were $2.958 billion; marketable securities were $397 million. Management reported $3.4 billion in cash and marketable securities and approximately $6.5 billion of liquidity.
- Total debt was $4.091 billion, down from $4.164 billion at year-end 2020; debt-to-capital was 31.2%, versus 31.7%. Working capital was $5.462 billion and the current ratio 1.82.
- Operating cash flow was pressured by a $293 million working-capital outflow, mainly from receivables and inventory. Investing activities used $25 million; financing activities used $745 million, including $418 million of share repurchases and $197 million of dividends.
- Committed revolving credit facilities totaled $3.5 billion, with $3.183 billion available after commercial paper borrowings; an additional $249 million was available under other facilities. The $1.5 billion 364-day facility expires August 2021.
Drivers, outlook and risks
- Revenue growth reflected stronger demand across most markets, particularly Components and China, where demand improved from the pandemic-affected prior-year period. North American sales grew 7%; international demand improved 45%.
- Higher volume and improved pricing lifted gross profit, but gross margin percentage fell because of variable compensation, premium freight and manufacturing inefficiencies. Supply-chain constraints also limited some distribution sales and raised costs.
- Management expected North American pickup, medium-duty and heavy-duty truck demand and aftermarket activity to remain strong. It expected China truck and construction demand to decline from 2020 record levels and anticipated weaker India end-market demand in Q2 due to COVID-19 lockdowns. No specific full-year revenue or earnings guidance is provided in the filing text.
- Management cited semiconductor and other supply shortages, COVID-19 outbreaks and facility disruptions, possible capacity restructuring charges, commodity costs, and regulatory and emissions uncertainty as key challenges. It planned 2021 capital expenditures of $725 million to $775 million, excluding $60 million to $70 million for internal-use software.
- The ongoing emissions certification review for pickup-truck applications remains a material uncertainty. Cummins said it could not predict the outcome or assure that the matter would not materially affect results or cash flows. The filing also describes litigation and environmental claims, while stating the company does not believe pending lawsuits are material individually or collectively.
- Warranty liability and related extended-warranty deferred revenue totaled $2.275 billion at quarter-end. The remaining accrual for the pre-2013 engine-system emissions campaign was $129 million.
Important facts for investors to verify
- Whether demand and segment profitability remain strong as pandemic comparisons ease, particularly in China and India.
- Whether supply-chain and semiconductor constraints continue to affect production, costs and sales.
- Developments and potential financial exposure from the pickup-truck emissions review and related regulatory discussions.
- Progress in restoring gross margin percentage, given higher freight, compensation costs and manufacturing inefficiencies.
- Cash conversion, inventory growth, planned buybacks and dividends, and renewal of the 364-day credit facility before its August 2021 expiry.