Cummins Inc. — FY 2020 Form 10-K
Business context and reporting period. Cummins designs, manufactures, distributes and services engine and power systems, components, distribution services, and emerging electric, battery, fuel-cell and hydrogen products. This annual report covers the fiscal year ended December 31, 2020; comparisons are with FY 2019 unless noted. The business was materially affected by COVID-19 and the resulting global downturn.
Key financial results
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Net sales | $19.811 billion | $23.571 billion | Down 16% |
| Gross margin | $4.894 billion; 24.7% of sales | $5.980 billion; 25.4% | Down $1.086 billion; down 0.7 percentage point |
| Operating income | $2.269 billion | $2.700 billion | Down 16% |
| Net income attributable to Cummins | $1.789 billion | $2.260 billion | Down 21% |
| Diluted EPS | $12.01 | $14.48 | Down 17% |
| Operating cash flow | $2.722 billion | $3.181 billion | Down $459 million |
The effective tax rate rose to 22.5% from 20.0%. FY 2020 diluted EPS included a $0.24 benefit from lower weighted-average shares, primarily due to repurchases. Cash dividends declared per share increased to $5.28 from $4.90.
Balance sheet, liquidity and capital
- Cash, cash equivalents and marketable securities were $3.862 billion at year-end, versus $1.470 billion a year earlier.
- Total debt was $4.164 billion, up from $2.367 billion; debt to total capital increased to 31.7% from 21.9%. The increase primarily reflected the August 2020 issuance of $2 billion of senior unsecured notes.
- Working capital was $5.562 billion and the current ratio was 1.88. Available revolving credit capacity was approximately $3.177 billion; management described total liquidity of about $7.0 billion including cash, securities and available credit.
- Capital expenditures were $575 million. Management planned $725–$775 million of capital expenditures, excluding internal-use software, for 2021.
Segment performance and material changes
- Sales declined in each major established segment: Engine down 20%, Distribution down 12%, Components down 13% and Power Systems down 19%. China was a notable exception to broader international weakness, with stronger demand in some truck, construction-related and component markets.
- Segment EBITDA was $1.235 billion for Engine, $665 million for Distribution, $961 million for Components, $343 million for Power Systems and negative $172 million for New Power. Distribution EBITDA increased 1%; EBITDA declined in Engine, Components and Power Systems. New Power remained in a development phase.
- Worldwide revenue fell 16%; U.S. and Canada sales declined 21%, while international sales declined 7%. Lower volumes, especially in North American on-highway markets, and weaker industrial and power-generation demand drove much of the decline.
Outlook, commentary and risks
- Management expected North American pickup demand to remain strong, truck demand in North America and India to improve, and aftermarket activity to strengthen. It expected China truck and construction demand to decline from 2020 record levels. The filing does not provide a clear consolidated 2021 revenue or earnings forecast.
- Management expected a 2021 effective tax rate of approximately 22.5%, excluding discrete items; pension contributions of approximately $75 million and net periodic pension cost of approximately $78 million.
- COVID-19 could continue to affect customer demand, supplier availability and facility operations, particularly in the first half of 2021. Management noted vaccine-related improvement was conditional on distribution and effectiveness.
- Cummins continued a formal review of emissions certification and compliance for pickup-truck applications after regulator concerns regarding 2019 RAM 2500/3500 engines. A revised calibration had been included in engines shipped since September 2019. The company could not estimate the matter’s financial impact and said remediation or regulatory outcomes could materially affect results and cash flows.
- Other significant risks include dependence on PACCAR (15% of 2020 sales; the only customer above 10%), reliance on China-based and other investees, single-source suppliers, cyclical end markets, foreign exchange, stricter emissions rules, product recalls and the transition toward electrified powertrains.
- FY 2020 included a $35 million favorable net income effect from India tax-law changes. A $20 million additional charge was recorded for a previously announced engine-system emissions campaign; the remaining campaign accrual was $151 million. No goodwill impairment was recorded, but automated-transmission reporting-unit fair value exceeded carrying value by about 18%.
Important facts for investors to verify
- Whether sales volumes and margins recover, and whether the 2021 market assumptions in management’s outlook materialize.
- Developments, possible remediation costs and any financial consequences from the pickup-engine emissions review.
- Cash generation, debt and liquidity after the 2020 note issuance, alongside planned capital spending, dividends and repurchases.
- Whether PACCAR demand and contributions from China-based investees remain resilient; investee income was $452 million in 2020, versus $330 million in 2019.
- Warranty and campaign exposure, including the $1.346 billion base product warranty liability and $151 million remaining accrual for the cited engine-system campaign.
- Automated-transmission goodwill sensitivity: the filing states that a 100-basis-point increase in the discount rate would reduce estimated fair value by 16%.