Cummins Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; nine-month results are compared with the period ended October 3, 2021. Cummins changed to calendar-quarter reporting in 2022. Unless otherwise noted, financial amounts are in U.S. dollars and millions.
Business context and results
Cummins designs, manufactures, distributes and services powertrains, components, power systems and electrification and hydrogen products. Its reportable segments are Engine, Distribution, Components, Power Systems and New Power. Results include Meritor from its August 3 acquisition; most Meritor activity is in Components, with its electric powertrain business in New Power.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $7,333 | $5,968 | $20,304 | $18,171 |
| Gross margin | $1,642; 22.4% | $1,414; 23.7% | $4,900; 24.1% | $4,378; 24.1% |
| Operating income | $626 | $666 | $2,127 | $2,211 |
| Net income attributable to Cummins | $400 | $534 | $1,520 | $1,737 |
| Diluted EPS | $2.82 | $3.69 | $10.68 | $11.86 |
| Operating cash flow | Not separately presented | Not separately presented | $1,145 | $1,524 |
Financial position and liquidity
- At September 30, 2022, cash and marketable securities totaled $2,965; working capital was $3,868 and the current ratio was 1.37.
- Total debt was $8,115, up from $4,159 at December 31, 2021; debt was 46.4% of total capital, versus 31.5%. The increase chiefly reflects Meritor financing, including a $2,000 term loan and increased commercial paper.
- Commercial paper outstanding was $2,393. Cummins reported $1,607 of remaining revolving credit capacity and a further $230 available under international and other domestic facilities.
- Nine-month investing cash outflow was $3,496, including $3,008 for business acquisitions. Financing provided $2,111; cash and cash equivalents decreased $93 to $2,499.
- Nine-month capital expenditures and internal-use software investment totaled $497. The company paid $633 in dividends and repurchased $370 of stock.
Material changes and drivers
- Q3 sales rose 23% and nine-month sales rose 12%, supported by pricing, demand and Meritor sales of $737 since acquisition. Foreign-exchange movements reduced international sales growth.
- Despite higher sales, Q3 net income attributable to Cummins fell 25% and nine-month net income fell 12%; diluted EPS declined 24% and 10%, respectively. Q3 gross margin rate fell 1.3 percentage points, largely because Meritor had a lower margin rate than legacy Cummins.
- Management cited higher material and freight costs, supply constraints, employee recognition expenses, increased research and development, acquisition and integration costs, higher interest expense, weaker equity income from investees (particularly in China), and unfavorable discrete tax items as pressures on earnings. Favorable pricing, volumes and lower variable compensation partly offset these items.
- Components sales rose 51% in Q3, including $732 of Meritor axles and brakes sales; Components EBITDA rose 17% to $297, including Meritor integration and filtration-separation costs. New Power recorded a $96 Q3 EBITDA loss on $50 of segment sales. Power Systems Q3 EBITDA rose 44% to $193.
Outlook, risks and unusual items
- Management expected strong North American truck demand, strong truck demand in India and robust aftermarket demand. It did not provide a specific consolidated revenue or EPS forecast in the supplied filing text.
- Management expected a 2022 effective tax rate of approximately 22%, excluding discrete items. Q3 included $57 of unfavorable discrete tax items, mainly related to internal restructuring ahead of the planned filtration-business separation.
- Supply-chain shortages, inflation, freight and conversion costs, and material costs could constrain production and harm margins, cash flow and results. COVID-related lockdowns and weak truck and construction markets in China were also risks.
- Cummins indefinitely suspended Russian operations. The nine-month net charge was $112; Russia-related inventory of approximately $13 and receivables of $15 were fully reserved. The company reported $71 of cash in Russia, partly intended for ongoing obligations, and said further costs or litigation could arise.
- The company recorded $30 for planned recalls of 2013–2018 RAM 2500/3500 trucks and $29 for 2016–2019 Nissan Titan trucks amid an ongoing EPA and CARB emissions review. Further financial impact could not be estimated and could materially affect results and cash flows.
- Warranty liabilities and related deferred revenue totaled $2,554 at period end. The filing also describes ordinary-course legal and environmental matters; management did not believe pending lawsuits were material individually or in aggregate, but could not assure final outcomes.
- Meritor’s preliminary purchase accounting included $1,610 of intangible assets and $850 of goodwill; its acquisition-related valuations remain subject to refinement. Meritor contributed $737 of Q3 revenue and a $37 net loss. Integration, realization of expected benefits and potential impairment are risks.
- Additional stated uses or plans included 2022 capital expenditures of $850–$900 for legacy Cummins and $40–$50 for Meritor, excluding internal-use software, plus $55–$65 for internal-use software. The filing also describes a contingent $1,000 filtration-separation credit agreement that would become available only after specified public-share-sale conditions.
Important facts for investors to verify
- Whether Meritor integration delivers expected benefits and how acquisition-related debt, interest and preliminary purchase accounting evolve.
- Whether supply-chain constraints and inflation ease, and whether pricing continues to offset higher input and freight costs.
- Developments in the EPA/CARB emissions review, recall costs and any additional liability or settlement requirements.
- Progress, costs, timing and financing implications of the planned filtration-business separation.
- Cash conversion and working-capital trends, commercial-paper balances, debt maturities and available liquidity.
- Changes in demand in China and other markets, Russia-related recoveries or exposures, and investee earnings.