Cummins Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020; comparison is with the three months ended March 31, 2019. Cummins designs, manufactures, distributes and services powertrains and related products worldwide.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $5.011 billion | $6.004 billion | Down 17% |
| Gross margin | $1.294 billion; 25.8% of sales | $1.532 billion; 25.5% | Dollar margin down 16%; rate up 0.3 points |
| Operating income | $634 million | $799 million | Down 21% |
| Net income attributable to Cummins | $511 million | $663 million | Down 23% |
| Diluted EPS | $3.41 | $4.20 | Down 19% |
| Operating cash flow | $379 million | $412 million | Down $33 million |
Lower volumes drove the decline in sales and gross profit. Lower compensation costs, material costs and warranty expenses partly offset volume pressure. The gross margin rate improved mainly on lower warranty costs and variable compensation.
Cash and marketable securities were $2.030 billion at March 29, 2020. Total debt was $3.351 billion, up from $2.367 billion at year-end 2019; debt to total capital increased to 29.5% from 21.9%, primarily from increased commercial paper borrowings. Commercial paper outstanding was $1.617 billion, leaving approximately $1.883 billion of the $3.5 billion revolving facilities available, plus $213 million under other facilities. The current ratio was 1.40, versus 1.50 at year-end.
Investing cash outflow was $99 million; financing cash inflow was $234 million. Financing included $957 million of net commercial paper borrowings, $550 million of share repurchases and $195 million of dividends. Cash increased $562 million during the quarter.
Changes versus prior comparable period
- Sales decreased across the major segments: Engine down 19%, Distribution down 9%, Components down 19% and Power Systems down 18%. New Power sales were $10 million, versus $3 million; its segment EBITDA loss widened to $43 million from $29 million.
- Total segment EBITDA declined 18% to $846 million. Power Systems EBITDA fell 44% to $77 million; Engine, Distribution and Components EBITDA declined 17%, 8% and 14%, respectively.
- International sales, excluding the U.S. and Canada, were 38% of total sales versus 39%. Unfavorable currency movements reduced sales by about 1% overall.
- Comprehensive income attributable to Cummins was $289 million, versus $731 million, including a $162 million foreign currency translation loss compared with an $84 million gain a year earlier.
Outlook, commentary and key risks
- Management expected COVID-19 to significantly affect second-quarter results and potentially results, financial condition and cash flows through the rest of 2020. Widespread customer shutdowns, weaker demand, supplier constraints and facility closures or reduced operations created substantial uncertainty; the duration and financial impact were not estimable.
- No full-year revenue or earnings guidance was provided. Management anticipated significantly weaker demand in most geographic markets for the remainder of 2020.
- Management expected annualized savings of approximately $250 million to $300 million from restructuring and other actions. It reduced planned 2020 capital expenditures to $500 million–$525 million, excluding $50 million–$60 million for internal-use software, and cited inventory reduction and tiered payroll cuts as cash-preservation measures.
- The 2019 workforce restructuring affected approximately 2,300 employees. The company recorded a $119 million charge in Q4 2019 and expected a further $61 million of cash payments during the remainder of 2020.
- Q1 earnings included a favorable $35 million, or $0.23 per share, net income impact from India tax-law changes. The effective tax rate was 19.4%. The filing also cites $18 million of technology-fee revenue and higher investee income; these items contributed to the year-over-year comparison.
- Regulatory and legal exposure includes the ongoing review of emissions certification for pickup-truck applications, with EPA, CARB, DOJ and SEC involvement. Cummins said it could not predict the outcome or assure that the matter would not materially affect results or cash flows. A new calibration for 2019 RAM 2500/3500 engines had been included in shipments since September 2019.
- The company reported a $214 million remaining accrual for the engine-system emissions campaign. Other ordinary-course claims and environmental matters were described; management did not believe the lawsuits were material individually or in aggregate, but noted outcomes could adversely affect the company.
- After quarter-end, Cummins registered for the Federal Reserve Commercial Paper Funding Facility and was approved; it had issued $230 million under the facility by April 24, 2020. Management described liquidity as strong and expected existing cash, operating cash flow and credit access to cover anticipated needs.
Important facts for investors to verify
- Subsequent quarterly filings: actual demand, production and supply-chain effects of COVID-19, and progress toward cost savings and cash-preservation targets.
- Commercial paper balances, access to revolving and CPFF funding, and liquidity as the $1.5 billion 364-day credit facility approached its August 2020 expiration.
- Developments, potential remediation costs and financial exposure from the emissions certification review and the existing engine-system campaign accrual.
- How much reported earnings benefited from India tax-law adjustments, technology fees and other investee income, and whether those items recur.
- Cash use for repurchases and dividends relative to operating cash flow, capital spending plans and debt levels.