Cummins Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Cummins designs, manufactures, distributes and services powertrains, components, power systems and emerging electrification and hydrogen products. This unaudited report covers the three months ended March 31, 2022, compared with the three months ended April 4, 2021. Cummins moved to calendar-quarter reporting in 2022.
Financial and operating metrics
| Metric | Q1 2022 | Prior comparable quarter | Change |
|---|---|---|---|
| Net sales | $6.385 billion | $6.092 billion | Up 5% |
| Gross margin | $1.532 billion; 24.0% of sales | $1.486 billion; 24.4% | Up $46 million; down 0.4 percentage points |
| Operating income | $604 million | $810 million | Down 25% |
| Net income attributable to Cummins | $418 million | $603 million | Down 31% |
| Diluted EPS | $2.92 | $4.07 | Down 28% |
| Cash from operations | $164 million | $339 million | Down $175 million |
Higher sales and favorable pricing supported gross profit, but rising material and freight costs, Russia-related charges, lower investee income and higher expenses reduced earnings. Working-capital needs were a significant cash-flow drag; the company reported a $530 million working-capital cash outflow versus $293 million a year earlier.
At March 31, 2022, cash and cash equivalents were $2.276 billion and marketable securities were $527 million. Total debt was $4.125 billion, and debt represented 30.6% of total capital. The current ratio was 1.68. Cummins reported approximately $6.0 billion of liquidity, including cash, marketable securities and available credit facilities; it had $311 million of commercial paper outstanding and no borrowings under its revolving credit facilities.
Segment sales increased in Engine (12%), Distribution (15%) and Power Systems (14%), while Components sales declined 8%. Segment EBITDA weakened in Distribution, Components and Power Systems; New Power remained loss-making as it continued development investment. Segment results included substantial Russia suspension costs.
Material changes and unusual items
- Cummins indefinitely suspended Russian operations on March 17, 2022. The quarter included $158 million of related costs, including inventory write-downs, receivable reserves and joint-venture impairment. The company expects continued collection difficulties and possible litigation, and further charges are possible.
- Supply-chain constraints continued to limit production and raise costs, including freight and material costs. China lockdowns also affected demand and supply chains.
- Unfavorable discrete tax items totaled $31 million; the effective tax rate was 26.8%, compared with 22.0% in the prior-year quarter.
- The company accrued $30 million for a planned recall and software calibration covering 2013–2018 RAM 2500 and 3500 trucks following discussions with the EPA and CARB. Cummins said further financial impact from its emissions review and regulatory discussions could be material but could not yet be estimated.
- Cummins agreed to acquire Meritor for approximately $3.7 billion, including assumed debt and net of acquired cash; closing was expected by year-end 2022, subject to approvals and other conditions. It also completed the $42 million purchase of its partner’s Cummins Westport joint-venture stake and, after quarter-end, closed the $346 million acquisition of Jacobs Vehicle Systems.
- Cummins announced plans to separate its Filtration business and reported $17 million of related costs in the quarter. It filed a confidential registration statement on April 20, 2022.
Outlook, risks and contingencies
Management described expected strength in North American truck demand, aftermarket activity and certain Indian markets. It also highlighted continued supply constraints, inflation in materials and commodities, China market weakness and COVID-related disruptions, the Russia suspension, and incremental Meritor integration and Filtration separation expenses. The filing does not provide a specific full-year revenue or EPS forecast.
Management expected a 2022 effective tax rate of approximately 21.5%, excluding discrete items, capital expenditures of $850–$900 million (excluding internal-use software), and $70–$80 million of internal-use software investment. It expected $17 million of additional defined-benefit pension contributions and approximately $31 million of annual net periodic pension cost.
Other notable exposures include ongoing emissions-related regulatory matters, product warranty and recall liabilities, and ordinary-course litigation and environmental claims. Cummins stated that existing lawsuits were not believed material individually or in aggregate, but noted that final outcomes could adversely affect results, financial condition or cash flows.
Important facts for investors to verify
- Whether supply constraints, higher input costs and China weakness continue to constrain revenue and margins.
- Further costs, asset recoverability and receivable collection outcomes from the suspension of Russian operations.
- The scope, timing and ultimate cost of the emissions review and 2013–2018 RAM recall.
- Meritor closing conditions, funding, integration costs and expected benefits; and the progress and costs of the Filtration separation.
- Cash conversion and working-capital trends, alongside planned capital spending, dividends and share repurchases.