Cummins Inc. 2013 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. Cummins designs, manufactures, distributes and services diesel and natural-gas engines, components and power-generation systems through four segments: Engine, Components, Power Generation and Distribution. The company reported results in millions of U.S. dollars unless otherwise noted.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $17.301 billion | $17.334 billion | Down 0.2% |
| Gross margin | $4.383 billion; 25.3% of sales | $4.508 billion; 26.0% | Down $125 million; margin down 0.7 percentage points |
| Operating income | $2.101 billion | $2.254 billion | Down 7% |
| Net income attributable to Cummins | $1.483 billion | $1.645 billion | Down 10% |
| Diluted EPS | $7.91 | $8.67 | Down 9% |
| Operating cash flow | $2.089 billion | $1.532 billion | Up $557 million |
| Capital expenditures | $676 million | $690 million | Down $14 million |
| Cash and marketable securities at year-end | $2.849 billion | $1.616 billion | Up $1.233 billion |
| Total debt at year-end | $1.740 billion | $775 million | Up $965 million |
The effective tax rate rose to 25.1% from 23.5%. Cummins reported a 12.1% operating margin (operating income divided by sales), versus 13.0% in 2012. The filing attributes lower earnings principally to weaker gross margin, lower investee income, higher operating expenses and a higher tax rate.
Working capital was $5.271 billion, with a 2.57 current ratio, compared with $4.031 billion and 2.29 in 2012. The debt-to-capital ratio increased to 18.1% from 10.0%. The company had $1.727 billion available under its revolving facility and reported a 0.70-to-1.0 leverage ratio against a maximum covenant of 3.25-to-1.0.
Material changes and segment results
- Engine: Sales fell 7% to $10.013 billion and EBIT fell 17% to $1.041 billion. Weaker stationary-power, heavy-duty truck and industrial demand—particularly mining and oil and gas—was partly offset by medium-duty truck growth.
- Components: Sales rose 8% to $4.342 billion and EBIT rose 24% to $527 million, led by emission-solutions demand, Euro VI pre-buy activity and a full year of Hilite acquisition contribution.
- Power Generation: Sales fell 7% to $3.031 billion and EBIT fell 24% to $218 million, reflecting weaker power-solutions and power-systems demand and lower gross margin.
- Distribution: Sales rose 14% to $3.749 billion and EBIT rose 5% to $388 million. Acquired North American distributors contributed approximately $507 million of incremental sales; acquisition-related costs and lower equity income partly offset the benefit.
International markets generated 52% of consolidated sales, down from 53% in 2012. PACCAR was the only customer exceeding 10% of sales, at approximately 12%. Sales to the eight largest customers collectively represented about 36%.
Fourth-quarter 2013 sales were $4.588 billion and net income attributable to Cummins was $432 million, or $2.32 diluted EPS. Comparable fourth-quarter 2012 figures were $4.292 billion, $369 million and $1.95, respectively.
Cash, capital allocation and financing
- Operating cash flow increased primarily because working-capital cash outflow narrowed to $65 million from $775 million in 2012; lower net income and lower dividends from equity investees were offsets.
- In September 2013, Cummins issued $1 billion of senior unsecured notes: $500 million at 3.65% due 2023 and $500 million at 4.875% due 2043. Net proceeds were $979 million.
- Cash dividends paid were $420 million; dividends declared were $2.25 per share, up from $1.80. Cummins repurchased $381 million of shares in 2013 and had $845 million remaining under its then-current $1 billion authorization.
- Global pension plans were reported 107% funded at year-end. Management expected $205 million of pension contributions in 2014.
Outlook, management commentary and risks
Management did not provide a specific 2014 revenue or EPS forecast in the supplied filing text. It expected continuing North American medium-duty truck share gains, further distributor acquisitions and higher Components demand associated with Euro VI requirements. Expected challenges included weak power-generation, India, North American oil and gas and mining markets, continued uncertainty in parts of Europe, foreign-exchange volatility and potentially weak enforcement of emerging-market emissions rules. Management expected the 2014 effective tax rate to be 28.5%, or 27% if the research tax credit were reinstated; planned capital expenditures were $700–$800 million, with $400–$500 million for distributor acquisitions and refinancings.
- Acquisitions: Cummins planned to acquire most remaining interests in partially owned U.S. and Canadian distributors over three to five years. Integration, regulatory approval, legal claims, costs and potential loss of customers or employees could affect anticipated benefits. A further Mid-South distributor acquisition closed in February 2014 for approximately $107 million total consideration.
- Market and customer exposure: Results are cyclical and sensitive to economic conditions, truck and industrial demand, infrastructure spending and customer outsourcing decisions. PACCAR concentration and dependence on significant OEMs are notable.
- Operations and regulation: Emissions requirements require ongoing engineering and capital spending. New-platform issues, recalls, warranty costs, capacity alignment and single-source supply disruptions could adversely affect results; 60–70% of direct-material part types were single-sourced.
- Other risks: Foreign exchange, commodity costs, tax assessments, pension assumptions, cyber threats, global compliance and litigation are identified risks. The company said pending lawsuits were not material individually or in aggregate, while noting outcomes could still materially affect results. It reported potential supplier-contract penalties of approximately $107 million if purchases ceased, but did not anticipate paying them.
Notable items include 2013 Power Generation charges of $8 million for an equity-investment impairment and an $8 million legal settlement; $12 million of Distribution acquisition remeasurement gains; and discrete tax items, including a $28 million research-credit benefit and a $21 million fourth-quarter net benefit. The 2012 comparison included a one-time $134 million tax benefit, $52 million of restructuring charges and a $20 million legal charge.
Most important facts for investors to verify
- Whether the 2014 outlook assumptions—especially weak power-generation, mining and oil-and-gas demand—translated into actual sales, margins and EPS.
- Whether operating cash flow remained strong after the unusually favorable year-over-year working-capital comparison.
- How much distributor acquisitions added to consolidated sales and earnings, and their effects on margins, cash needs and equity income.
- Whether higher debt and interest expense remained manageable alongside repurchases, dividends, capital spending and pension contributions.
- Whether the forecast tax rate and research-credit assumptions, warranty estimates, pension assumptions and legal or supplier contingencies changed materially.