Cummins Inc. — Q2 2010 Form 10-Q
Reporting period: 13 weeks ended June 27, 2010; six-month results are through the same date. Dollar amounts are in millions except per-share data. Cummins designs, manufactures, distributes and services engines, power-generation systems and related components.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $3,208 | $2,431 | $5,686 | $4,870 |
| Gross margin | $753; 23.5% | $448; 18.4% | $1,354; 23.8% | $893; 18.3% |
| Operating income | $396 | $121 | $642 | $150 |
| Net income attributable to Cummins | $246 | $56 | $395 | $63 |
| Diluted EPS | $1.25 | $0.28 | $2.00 | $0.32 |
| Operating cash flow | Not presented quarterly in the supplied filing text | $427 | $321 |
- Q2 sales rose 32%; six-month sales rose 17%. Q2 gross margin improved 5.1 percentage points and six-month margin 5.5 points year over year.
- For the six months, capital expenditures were $91; operating cash flow less capital expenditures was $336 (calculated). Cash and cash equivalents were $924 at June 27, versus $930 at year-end 2009; marketable securities were $269.
- Working capital was $2,638 and the current ratio was 1.94, down from 2.06 at year-end. Inventories increased $311 to $1,652, in part to support anticipated demand.
- Total debt was $778, versus $703 at year-end; debt was 15.8% of total capital. The filing reports leverage of 0.51x and interest coverage of 34.43x against covenant limits of 3.0x maximum and 1.5x minimum; Cummins was in compliance.
Material changes and operating drivers
- Profitability improved substantially as emerging-market demand recovered, developed-market sales improved modestly, production costs benefited from prior restructuring, and warranty expense declined. Higher equity income from investees also contributed. These gains were partly offset by higher SG&A, research and development, and income tax expense.
- Q2 Engine sales increased 45% and Components sales 45%; Distribution rose 24%, including the CWC acquisition; Power Generation rose 16%. For the first half, Power Generation sales declined 3% while the other three segments grew.
- North American heavy-duty truck demand remained weak following OEM purchases ahead of the 2010 emissions standards change. Heavy-duty on-highway demand was down approximately 69% in the first half versus 2009; medium-duty truck shipments were down 47%.
- Restructuring charges were nil in 2010, versus $7 in Q2 2009 and $73 in the first half of 2009. The approximately 4,200 employee terminations under the 2009 program were substantially complete.
- Q1 acquisition of Cummins Western Canada (CWC) added $62 of Q2 sales and $116 of first-half sales to Distribution. The transaction generated a $12 gain from remeasurement of Cummins’ prior ownership interest.
Outlook, risks and unusual items
- Management expected demand to improve through 2010, with emerging markets remaining strong and North American heavy-duty engine sales to OEMs beginning to improve in the second half. Order trends were described as consistent with expected organic revenue growth in the second half. The filing provides no quantified revenue or earnings guidance.
- Management expected approximately $400 of 2010 capital expenditures, approximately $175 of defined-benefit pension contributions and approximately $53 of other postretirement benefit claims and premiums; it also expected strong operating cash flow in 2010.
- In July 2010, the board approved an increase in the quarterly dividend from $0.175 to $0.2625 per share. The company also entered a new four-year, $1.24 billion unsecured revolving facility, maturing July 16, 2014.
- Key risks include cyclical markets, customer credit and OEM production patterns, competition and product development, emissions regulation, commodity and currency fluctuations, reliance on large customers, financing availability, and litigation and environmental claims.
- Unusual contingency: Cummins claimed $227 for 2008 flood damage and business interruption; insurers had paid $92 by June 27, 2010, disputed aspects of the claim, and litigation was pending. Recovery of the remaining claimed amount was uncertain.
- Other exposures include a maximum $92 of guarantees, approximately $69 of potential supplier-contract penalties if purchases ceased (not currently expected), and ordinary-course litigation. Management did not consider the lawsuits material individually or in aggregate, but noted final outcomes could adversely affect results.
Important facts for investors to verify
- Whether the expected second-half recovery, especially in North American heavy-duty trucks, materialized and translated into organic growth.
- Whether inventory growth and receivables collection supported the cash-flow outlook as sales recovered.
- Actual 2010 capital spending, pension funding and postretirement payments versus management estimates.
- Outcome and potential recovery from the disputed flood-insurance claim, and any material developments in litigation or guarantees.
- Effects of the CWC acquisition and the nonrecurring $12 remeasurement gain on future Distribution comparisons.