Cummins Inc. — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022; comparison is primarily with fiscal 2021. The filing was dated February 14, 2023. Cummins designs, manufactures, distributes and services powertrains, components, power generation equipment and emerging electric, battery, fuel-cell and hydrogen technologies through five segments: Engine, Components, Distribution, Power Systems and New Power.
Financial performance and liquidity
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $28.074 billion | $24.021 billion | +17% |
| Gross margin | $6.719 billion; 23.9% of sales | $5.695 billion; 23.7% | +18%; margin +0.2 percentage points |
| Operating income | $2.929 billion | $2.706 billion | +8% |
| Net income attributable to Cummins | $2.151 billion | $2.131 billion | +1% |
| Diluted EPS | $15.12 | $14.61 | +3% |
| Cash from operating activities | $1.962 billion | $2.256 billion | Down $294 million |
| Total debt | $7.855 billion | $4.159 billion | Up $3.696 billion |
Sales growth reflected Meritor sales of $1.9 billion after its August acquisition, favorable pricing and higher demand in most segments and regions. Gross-margin improvement from pricing and volume was partly offset by materials and compensation costs. Net income growth lagged sales growth, with higher operating expenses and interest costs, lower investee income, Russian suspension charges and a $102 million loss on corporate-owned life insurance among the offsets.
Operating cash flow fell mainly because working-capital needs increased; working capital used $1.0 billion of cash, versus $359 million in 2021. Investing cash outflow was $4.172 billion, including $3.191 billion of acquisitions and $916 million of capital expenditures. Financing cash flow was positive $1.669 billion, supported by borrowings. Cash and marketable securities totaled $2.573 billion at year-end. The debt-to-capital ratio rose to 44.1% from 31.5%; working capital declined to $3.030 billion from $5.225 billion and the current ratio to 1.27 from 1.74.
Year-end commercial paper outstanding was $2.574 billion, leaving $1.426 billion of capacity under the combined $4.0 billion commercial-paper and revolving-credit programs; an additional $226 million was available under international and other domestic facilities. The company reported compliance with debt covenants and a net leverage ratio of 0.31 to 1.0, against a maximum covenant of 0.65 to 1.0. The $2.0 billion Meritor-related term loan is due in 2025; required long-term debt principal payments include $573 million in 2023 and $2.061 billion in 2025.
Segments and material changes
- Engine: Sales rose 10% to $10.945 billion; segment EBITDA increased 9% to $1.541 billion. Favorable pricing and stronger North American truck demand helped, while lower China joint-venture earnings, material costs and R&D costs weighed on results.
- Components: Sales rose 27% to $9.736 billion and EBITDA rose 14% to $1.346 billion. Meritor axles and brakes contributed $1.879 billion in segment sales; EBITDA margin fell to 13.8% from 15.4%, partly reflecting costs and integration activity.
- Distribution: Sales increased 15% to $8.929 billion and EBITDA increased 21% to $888 million, primarily on stronger North American demand.
- Power Systems: Sales increased 14% to $5.033 billion and EBITDA increased 20% to $596 million, supported by power generation, industrial and generator-technology demand and pricing.
- New Power: Sales grew 71% to $198 million, but EBITDA loss widened to $340 million from $223 million as the business continued developing and commercializing emerging technologies.
Other 2022 transactions included acquisitions of Jacobs Vehicle Systems for $345 million, Siemens Commercial Vehicles Propulsion for approximately $187 million, and the remaining interest in Cummins Westport for $42 million. The company also signed an agreement to acquire Teksid’s Mexican foundry operations for approximately €115 million, subject to closing conditions; closing was expected in early 2023. Meritor contributed $1.9 billion of 2022 revenue and a $43 million net loss after acquisition.
Outlook, risks and unusual items
Management expected strong 2023 demand for North American trucks, India trucks, Power Systems and aftermarket services, and anticipated some improvement in China truck demand from 2022 levels. It also expected China construction demand to decline. The filing provides qualitative outlook rather than a numerical forecast for 2023 revenue or earnings; it does not provide a clear value for company-wide growth guidance. Management identified persistent supply constraints, inflation and labor costs, higher interest expense, Meritor amortization and filtration-separation costs as headwinds. Planned 2023 capital expenditures were $1.2 billion to $1.3 billion; the expected effective tax rate was approximately 22%, excluding discrete items.
- Emissions matters: Cummins was reviewing certification and compliance for pickup-truck applications and working with EPA and CARB. It accrued $30 million for RAM model-year 2013–2018 recalls and $29 million for Titan model-year 2016–2019 recalls. The company said further financial impact could not yet be estimated and could be material.
- Russia: The company indefinitely suspended Russian operations in March 2022 and recorded $111 million of related costs. At year-end, $14 million of Russian receivables were fully reserved; $66 million of cash remained, partly for ongoing obligations. Additional costs or litigation were possible.
- Filtration separation: Cummins was pursuing a planned separation into a standalone company and incurred related costs. A $1.0 billion financing arrangement for the proposed business was contingent on a public share sale and was set to terminate if no sale occurred by March 30, 2023.
- Other exposures: Supply-chain shortages, price inflation, customer concentration, cyclical demand, foreign exchange, higher interest rates and reliance on investees—particularly China-based joint ventures—could affect results. PACCAR accounted for 16% of 2022 sales; four major OEM customers together accounted for 36%.
- Unusual accounting and operational points: The filing reports $83 million of Meritor acquisition and integration costs and $81 million of filtration-separation costs in segment EBITDA disclosures. Meritor goodwill and intangible-asset valuations are preliminary or judgment-intensive; impairment risk could increase if expected cash flows weaken. Internal-control assessment and audit scope excluded Meritor, representing approximately 12% of year-end assets and 7% of annual sales.
Important facts for investors to verify
- Progress, final costs and any regulatory resolutions related to the emissions review and RAM/Titan recalls.
- Meritor integration, realized synergies, acquired-asset valuations and the effect of added debt and amortization.
- Status, timing, costs and financing of the filtration-business separation.
- Whether supply constraints and inflation ease, and whether working capital converts into stronger operating cash flow.
- Debt repayment and refinancing needs, especially the 2023 maturities and 2025 term-loan and note payments.
- Recovery in China and performance of China joint ventures, alongside customer concentration and New Power’s commercialization progress.