Cummins Inc. — Q1 2014 Form 10-Q
Business and period: Cummins designs, manufactures, distributes and services engines, components and power-generation systems worldwide. This unaudited quarter ended March 30, 2014, and comprised 13 weeks; the comparison quarter ended March 31, 2013, and also comprised 13 weeks.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $4.406 billion | $3.922 billion | +12% |
| Gross margin | $1.116 billion; 25.3% of sales | $957 million; 24.4% | +17%; +0.9 percentage points |
| Operating income | $513 million | $414 million | +24% |
| Net income attributable to Cummins | $338 million | $282 million | +20% |
| Diluted EPS | $1.83 | $1.49 | +$0.34 |
| Operating cash flow | $263 million | $428 million | -$165 million |
Higher volumes and lower material and commodity costs supported gross margin and earnings; unfavorable currency movements, higher SG&A and a higher tax rate partly offset gains. The effective tax rate was 29.9%, versus 27.6%. The 2014 rate included discrete tax items; management expected a full-year rate of approximately 28.5%, excluding one-time items. Interest expense rose to $17 million from $6 million, partly reflecting the prior-year $1 billion debt issuance.
Segments and material changes
- Engine: sales of $2.563 billion, up 11%; EBIT of $269 million, up 38%. North American on-highway demand strengthened; stationary power and mining-related demand weakened.
- Components: sales of $1.230 billion, up 21%; EBIT of $167 million, up 40%, led by emission-solutions and turbo-technology demand.
- Power Generation: sales of $639 million, down 14%; EBIT of $25 million, down 51%, amid lower volumes across businesses and markets.
- Distribution: sales of $950 million, up 22%, substantially reflecting consolidation of North American distributors; EBIT fell 20% to $76 million and margin declined to 8.0% from 12.2%.
Worldwide revenue growth was led by a 25% increase in the U.S. and Canada. International revenue declined by less than 1%; management cited weaker power-generation and mining demand, partly offset by improvement in China. Segment comparisons include acquisition-related fair-value gains of $6 million in 2014 and $7 million in 2013.
Cash, debt and liquidity
- Cash and cash equivalents were $2.178 billion at March 30, down $521 million from year-end; marketable securities were $129 million. Current assets were $8.499 billion and current liabilities $3.555 billion; the current ratio was 2.39, versus 2.57 at year-end.
- Operating cash flow was $263 million. Cash used in investing was $187 million and cash used in financing was $602 million, including $419 million of share repurchases and $115 million of dividends. Working-capital outflows and higher pension contributions weighed on operating cash flow.
- Total debt, including current maturities, was approximately $1.693 billion, compared with $1.740 billion at year-end; debt-to-capital was 18.0%, versus 18.1%. Cash and marketable securities exceeded reported debt. The company reported $1.7 billion available under its revolving credit facility and $318 million under other facilities.
- Quarterly dividend declared per share was $0.625, versus $0.50. Cummins repurchased $419 million of shares during the quarter.
Outlook, commentary and risks
Management expected North American medium- and heavy-duty truck demand and market-share gains, distributor acquisitions, and Euro VI emissions requirements to support sales. It expected continued weakness in power generation, India, Brazil, some European markets and mining, with foreign-exchange volatility also a potential earnings headwind. No specific full-year revenue or earnings guidance was provided in the supplied filing text.
- Planned 2014 capital expenditures: $700 million to $800 million. Planned spending on distributor acquisitions and debt retirements: approximately $400 million to $500 million.
- Expected 2014 global pension contributions: approximately $205 million; additional defined-benefit pension contributions and other postretirement payments of $91 million and $31 million, respectively, were anticipated for the remainder of the year. Management expected pension and other postretirement benefit cost to decline by about $36 million pre-tax versus 2013.
- On February 14, Cummins acquired the remaining 62.2% of Cummins Mid-South for preliminary consideration of $116 million, including debt repayment and amounts payable in future periods. On March 31, after quarter-end, it acquired the remaining 50% of Cummins Southern Plains for approximately $88 million, including debt repayment; its results were to be included beginning in Q2.
- Key disclosed risks include cyclical market demand, emissions regulation and product-development costs, reliance on major OEM customers and investees, single-source suppliers, commodity and currency movements, product recalls and warranty claims, pension performance, and execution and integration of distributor acquisitions.
- The filing describes ordinary-course litigation, including product, environmental, tax and Brazilian labor matters. Cummins said it did not consider the lawsuits material individually or in aggregate and had accrued estimable expected liabilities, while cautioning that outcomes could still adversely affect results. Potential supplier-termination penalties were approximately $105 million; the company did not anticipate paying them. Additional joint-venture commitments were $54 million for 2014.
Investor verification priorities
- Track whether North American truck and Components growth offsets continued weakness in Power Generation, mining and international markets.
- Assess working-capital conversion and cash flow, given the quarter’s receivables and inventory increases, lower operating cash flow and planned investment and shareholder returns.
- Monitor distributor-acquisition spending, integration, segment margins and the contribution from newly consolidated distributors.
- Verify achievement of the stated 2014 capital-expenditure, pension-contribution and tax-rate expectations, and review material developments in warranty, litigation and supplier commitments.