Cummins Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter ended September 25, 2011 (13 weeks); year-to-date figures cover nine months. Comparisons are with the quarter and nine months ended September 26, 2010. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and performance
Cummins designs, manufactures, distributes and services engines, power generation systems and related components. It reports four segments: Engine, Power Generation, Components and Distribution. Results reflected a strong North American on-highway recovery and higher demand across most segments, with growth moderating in some emerging markets.
| Metric | Q3 2011 | Q3 2010 | First 9 months 2011 | First 9 months 2010 |
|---|---|---|---|---|
| Net sales | $4,626 | $3,401 | $13,127 | $9,087 |
| Gross margin | $1,188 | $830 | $3,348 | $2,184 |
| Gross margin as % of sales | 25.7% | 24.4% | 25.5% | 24.0% |
| Operating income | $639 | $435 | $1,936 | $1,077 |
| Income before taxes | $629 | $438 | $1,913 | $1,087 |
| Net income attributable to Cummins | $452 | $283 | $1,300 | $678 |
| Diluted EPS | $2.35 | $1.44 | $6.69 | $3.43 |
Cash, debt and liquidity
- Operating cash flow for the first nine months was $1,368, up from $619 a year earlier. Working-capital increases used $351 of cash, versus $300 in the prior-year period, mainly reflecting higher sales.
- Cash and cash equivalents were $1,165 at September 25; marketable securities were $273, for combined cash and securities of $1,438. Cash and securities increased $76 from year-end 2010.
- Total debt was $801, down from $843 at December 31, 2010; debt-to-capital was 12.6%, versus 14.4%. Current assets were $7,026 and current liabilities $3,742; working capital was $3,284 and the current ratio 1.88.
- Management reported $1.2 billion available under its revolving credit facility, $271 available under international and other domestic facilities, and $187 available under its receivables program, subject to eligible receivables.
- Capital expenditures were $377 for the nine months, compared with $170. The company expected 2011 capital expenditures of approximately $600–$650.
Changes versus the prior comparable period
- Q3 sales rose 36%; operating income rose 47%; net income attributable to Cummins rose 60%; diluted EPS rose 63%. For nine months, sales rose 44%, operating income 80%, attributable net income 92%, and diluted EPS 95%.
- Sales increased in all four segments. Q3 segment sales growth was Engine 43%, Power Generation 10%, Components 32% and Distribution 37%. Engine led the improvement, benefiting from heavy-duty truck recovery and industrial demand.
- Gross margin improved, supported by higher volume and pricing. For the nine months, increased base warranty costs and commodity costs were offsets. SG&A and research, development and engineering expenses increased in absolute terms, although SG&A declined as a share of sales.
- Equity, royalty and interest income from investees increased to $102 in Q3 and $315 year to date, from $88 and $261, respectively.
- Share repurchases were $546 for the nine months, versus $241 a year earlier. The quarterly dividend was increased from $0.2625 to $0.40 per share in July 2011.
Outlook, commentary and risks
- Management expected North American on-highway truck demand to remain strong through the rest of 2011, with global oil and gas and mining markets also expected to remain strong. It expected demand in most markets to remain strong through year-end.
- Management cautioned that growth could soften in China’s on-highway truck and off-highway construction markets and India’s power generation market, amid inflation-control measures and tighter credit. Other pressures included higher commodity costs, increased product-development spending and slower joint-venture growth as capacity investment continued.
- Management’s expected 2011 effective tax rate was approximately 29.5%, absent discrete items. Q3 and nine-month effective rates were 25.0% and 28.2%, respectively, including a net $29 discrete tax benefit for the periods, partly offset by additional uncertain-tax-position reserves and other charges.
- The completed exhaust-business divestiture generated a $68 pretax gain ($37 after tax) in the first nine months. A light-duty filtration business sale was expected to close in Q4 for approximately $90–$95, with an expected pretax gain of $45–$50.
- In October 2011, Cummins received $40 to settle outstanding claims related to 2008 flood damage and expected to record an approximately $40 gain in Q4, net of remaining flood-related expenses.
- Risks include cyclical end markets, economic and credit conditions, competition, emissions regulation and product-development execution, customer concentration, commodity and currency volatility, and litigation or governmental proceedings. The company said ordinary-course lawsuits were not believed material individually or in aggregate, but adverse resolution could affect results. Brazilian tax matters and a disputed insurance claim were also discussed.
Most important facts for investors to verify
- Whether North American truck demand and the strength of oil, gas and mining markets continued as management expected, and whether emerging-market growth weakened further.
- Whether gross-margin gains persisted as commodity costs, product mix and warranty experience changed; warranty liability was $1,018 at quarter-end.
- Whether planned 2011 capital spending, working-capital needs, pension contributions and share repurchases were funded without weakening liquidity.
- Completion and final proceeds of the light-duty filtration divestiture, and recognition of the anticipated Q4 flood-insurance settlement gain.
- Resolution and potential earnings effects of uncertain tax positions, Brazilian tax matters, litigation and environmental contingencies.