Cummins Inc. — Q1 2013 Form 10-Q
Business context and period. Cummins designs, manufactures, distributes and services engines, related components and power-generation systems worldwide. This unaudited quarter ended March 31, 2013 and comprised 13 weeks; comparison is with the 13 weeks ended April 1, 2012. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $3.922 billion | $4.472 billion | Down 12% |
| Gross margin | $957 million; 24.4% | $1.198 billion; 26.8% | Down $241 million; 2.4 percentage points |
| Operating income | $414 million | $648 million | Down 36% |
| Net income attributable to Cummins | $282 million | $455 million | Down 38% |
| Diluted EPS | $1.49 | $2.38 | Down 37% |
| Operating cash flow | $428 million | $21 million | Up $407 million |
Lower volumes, unfavorable product mix and reduced investee income pressured earnings; lower SG&A partly offset the declines. Improved pricing and lower material costs partly mitigated gross-margin pressure. Q1 cash flow benefited from more favorable working capital, including a $294 million reduction in tax payments associated with an income tax refund; operating cash flow should not be read as a simple indicator of underlying earnings improvement.
Segments: Engine sales fell 19% and EBIT fell 49%; Components sales fell 7% and EBIT fell 17%; Power Generation sales fell 4% and EBIT fell 33%. Distribution sales were essentially flat and EBIT rose 1%, including a $7 million gain from remeasuring Cummins’ prior interest in Cummins Northwest after obtaining control.
Balance sheet, cash flow and liquidity
- At March 31, cash and cash equivalents were $1.483 billion and marketable securities were $196 million, totaling $1.679 billion, versus $1.616 billion at year-end.
- Total debt was $803 million, compared with $775 million at December 31, 2012; debt to total capital was 10.2%, versus 10.0%. Long-term debt, including current maturities, had a reported fair value of $954 million.
- Current assets were $7.220 billion and current liabilities $3.257 billion; working capital was $3.963 billion and the current ratio was 2.22. Inventory rose $166 million to $2.387 billion; inventory turnover decreased to 5.0 from 5.7, while days’ sales in receivables increased to 58 from 53.
- Investing cash outflow was $143 million, including $114 million of capital expenditures. Financing cash outflow was $103 million, including $95 million of dividends. Management planned approximately $850 million of capital expenditures for 2013.
- Management reported $1.7 billion available under its revolving credit facility and $285 million under international and other domestic facilities. About $1.3 billion of cash and marketable securities was held by foreign subsidiaries; repatriating certain permanently reinvested earnings could trigger U.S. tax.
Outlook, commentary and risks
Management expected demand to improve through 2013, led by North American on-highway markets, with construction and international power-generation markets expected to improve in the second half. The Navistar heavy-duty supply agreement and expected Brazilian truck-market growth were cited as potential positives. The filing did not provide a clear consolidated revenue or earnings forecast.
Challenges identified included sluggish European demand, low industrial demand and high equipment inventories in China, continuing weakness in North American oil and gas, possible further mining-market weakness, and currency volatility. Management cited lower first-half North American demand versus 2012, with improvement anticipated thereafter. The full-year effective tax rate was expected to approximate 29.5%, excluding one-time items.
Other notable items: the reinstated research tax credit produced a $28 million Q1 tax benefit, partly offset by a $17 million discrete tax expense, primarily from writing off an unrecoverable deferred tax asset. The quarter also included a $10 million gain on marketable securities and a $7 million investee fair-value gain. Pension contributions were $76 million in Q1; management expected approximately $165 million for 2013. Supplier minimum-purchase penalties could total about $114 million if purchases ceased, and a separate take-or-pay arrangement required approximately $73 million of annual purchases through 2018; the company did not anticipate paying penalties. The company described ordinary-course litigation and environmental matters, and said outcomes could nonetheless adversely affect results if materially unfavorable.
Most important facts for investors to verify
- Whether the anticipated recovery in North American on-highway demand and second-half improvement in other markets materialized.
- How much of Q1 operating cash flow reflected sustainable operating performance versus the tax refund and working-capital timing.
- Whether elevated inventories, slower receivable collections and lower inventory turnover improved in subsequent quarters.
- Whether segment margins recovered after the sharp EBIT declines, particularly in Engine and Power Generation.
- Actual 2013 capital spending, pension contributions, tax rate and any material changes in litigation, warranty or supplier commitments.