Cummins Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Cummins is a global power-solutions manufacturer with five segments: Components, Engine, Distribution, Power Systems and Accelera.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $8.403 billion | $8.453 billion | Down 1% |
| Gross margin | $2.041 billion; 24.3% of sales | $2.029 billion; 24.0% | Up $12 million; 0.3 percentage points |
| Operating income | $923 million | $1.026 billion | Down 10% |
| Net income attributable to Cummins | $1.993 billion | $790 million | Includes $1.333 billion Atmus divestiture gain |
| Diluted EPS | $14.03 | $5.55 | Includes divestiture gain |
| Cash from operations | $276 million | $495 million | Down $219 million |
The reported net-income increase does not reflect underlying operating growth: the Atmus gain was recorded in other income and was largely non-taxable. Excluding that gain, the filing does not provide a single adjusted net-income figure. Gross margin improved primarily on pricing, partly offset by lower volumes and higher compensation costs. SG&A rose 11% to $839 million, while R&D increased 5% to $369 million.
Operating cash flow fell chiefly because of higher working-capital needs and lower operating income. Working capital used $606 million of cash, versus $494 million in the prior-year quarter.
Segments and material changes
- Components: Sales $3.332 billion, down 6%; EBITDA $473 million, down 7%. Lower volumes, weaker demand and the Atmus divestiture contributed.
- Engine: Sales $2.928 billion, down 2%; EBITDA $414 million, down 9%. Construction and heavy-duty truck demand weakened; medium-duty truck and bus sales increased.
- Distribution: Sales $2.535 billion, up 5%; EBITDA $294 million, down 12%. Power-generation demand, including data-center-related demand, supported sales; compensation costs, inventory adjustments and mix pressured EBITDA.
- Power Systems: Sales $1.389 billion, up 3%; EBITDA $237 million, up 8%, mainly on power-generation demand and pricing.
- Accelera: Sales $93 million, up 9%; EBITDA loss widened to $101 million from $94 million.
Worldwide sales were nearly flat. Lower heavy-duty truck, construction and emission-solutions demand, and reduced sales following the Atmus divestiture, were mostly offset by higher power-generation demand. Distribution sales growth was notably supported by power generation.
Cash, debt and liquidity
- Cash and marketable securities totaled $3.051 billion at March 31, 2024, up from $2.741 billion at year-end. Cash alone was $2.541 billion.
- Total debt was $6.835 billion, versus $6.696 billion at December 31, 2023; debt to total capital was 40.4%, compared with 40.3%. The current ratio was 1.34.
- Cash from investing activities was an outflow of $406 million, including $169 million of capital expenditures. Financing provided $499 million, including proceeds from the February issuance of $2.25 billion of senior notes; net proceeds were $2.2 billion.
- Available revolving credit capacity was approximately $3.4 billion after commercial paper outstanding, with another $396 million available under international and other domestic facilities. A $2.0 billion 364-day facility was due to expire June 3, 2024; Cummins said it intended to renew or replace facilities.
- In April, Cummins issued approximately $1.0 billion of commercial paper ahead of settlement payments and repaid another $100 million of its 2025 term loan.
Outlook, contingencies and other notable items
- Management expected North American medium-duty trucks, India truck markets, power generation, mining and aftermarket demand to remain supportive; North American heavy-duty truck demand was expected to weaken modestly, particularly in the second half of 2024.
- Management cited material, labor and other inflationary costs as earnings challenges. It expected the emissions settlement payments to reduce 2024 liquidity and increase interest expense.
- Expected 2024 capital expenditures were $1.2 billion to $1.3 billion, with more than 65% planned for North America. The expected 2024 effective tax rate was approximately 24%, excluding discrete items; Q1’s reported rate was 8.7%, affected by the Atmus gain and other favorable tax items.
- The emissions Settlement Agreements became final and effective in April 2024. Cummins recorded a $2.0 billion charge in Q4 2023; approximately $1.9 billion related to payments began in April, with most expected in May. The agreements also require recalls, mitigation projects, extended warranties, testing and compliance measures. Noncompliance may trigger stipulated penalties.
- Further regulatory review and shareholder, consumer and third-party litigation related to emissions matters remain risks. Cummins cautioned that additional costs and reputational damage could materially affect results, financial condition or cash flows.
- On March 18, Cummins completed the tax-free split-off of its remaining 80.5% Atmus ownership, exchanging 67 million Atmus shares for 5.6 million Cummins shares recorded as treasury stock. Atmus’s results remain included through the divestiture date; the transaction was not presented as a discontinued operation.
- A proposed U.S. battery-cell joint venture involving Accelera, Daimler Truck, PACCAR and EVE Energy was expected to finalize formation and initial funding in Q2 2024. The partners expected to invest $2 billion to $3 billion in a 21-GWh facility.
Important facts for investors to verify
- Underlying earnings and operating trends excluding the one-time Atmus gain, including segment margins and the effects of higher compensation and warranty costs.
- Actual timing and amount of emissions settlement cash payments, and whether required recall, mitigation and compliance obligations create additional costs or claims.
- Progress in renewing or replacing the 364-day credit facility and the effect of settlement funding and borrowing costs on liquidity and debt.
- Whether power-generation and data-center demand offsets weakness in heavy-duty trucks, construction and other markets during the remainder of 2024.
- Final timing, funding and investment commitments for the battery-cell joint venture.