Cummins Inc. — Form 10-Q Summary
Reporting period: Third quarter ended September 27, 2009 (13 weeks), and nine months ended September 27, 2009. Amounts are in millions of dollars except per-share data. Cummins designs, manufactures, distributes and services engines, power-generation systems and related components worldwide.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $2,530 | $3,693 | $7,400 | $11,054 |
| Gross margin | $503 (19.9%) | $820 (22.2%) | $1,396 (18.9%) | $2,406 (21.8%) |
| Operating income | $147 | $383 | $297 | $1,170 |
| Net income attributable to Cummins | $95 | $229 | $158 | $712 |
| Diluted EPS | $0.48 | $1.17 | $0.80 | $3.62 |
| Operating cash flow | Not stated for quarter | $730 | $725 |
- Sales declined 31% in Q3 and 33% year to date; gross margin fell 39% and 42%, respectively. Lower volumes were the principal driver. Q3 operating margin was approximately 5.8%, versus 10.4% a year earlier.
- Year-to-date operating cash flow was nearly unchanged despite substantially lower earnings, supported by working-capital reductions, including inventory. Capital expenditures were $204, down from $330; cash used in investing was $364 and cash used in financing was $120.
- Cash and cash equivalents were $686 at September 27, versus $426 at year-end 2008; marketable securities were $148. Management reported total cash, equivalents and securities of $834, plus $1.07 billion available on the revolving facility, $173 million in international facilities and $79 million under the receivables program.
- Total debt was $681, down from $698 at year-end; debt-to-total-capital was 15.2%, versus 16.7%. Current assets were $4,643 and current liabilities $2,311; working capital was $2,332 and the current ratio 2.01.
- Cash dividends declared were $0.175 per share in Q3. The nine-month dividend was $0.525 per share.
Material changes and operating trends
- Demand contracted across all four segments. Q3 external sales declined year over year in Engine (34%), Power Generation (32%), Components (26%) and Distribution (27%). Nine-month sales were down in each segment as well.
- Q3 segment EBIT was $61 in Engine, $23 in Power Generation, $31 in Components and $55 in Distribution. Engine, Power Generation and Components EBIT fell sharply from 2008; Distribution EBIT declined less, supported by investee income and cost reductions.
- Pricing and lower production costs partially offset the volume impact on gross margin. Warranty costs were a further headwind; warranty provision was 3.3% of sales in both 2009 periods, versus 2.7% and 2.9% in the comparable 2008 periods.
- SG&A and research, development and engineering spending declined in dollars, but each increased as a proportion of sales due to the lower revenue base. Equity, royalty and interest income from investees fell to $57 in Q3 and $147 for nine months.
- Inventories fell to $1,461 from $1,783 at year-end. Receivables days increased to 65 from 48 at year-end; inventory turnover was 4.7 versus 6.2.
Outlook, risks and unusual items
- Management expected full-year 2009 sales to be significantly below 2008. It said most markets appeared to have bottomed and were stabilizing, with improvement in China, India and Brazil; demand was expected to remain weak in most markets through year-end, apart from North American on-highway activity ahead of 2010 emissions standards.
- Management expected North American on-highway engine sales to be weaker in the first half of 2010 following pre-standard demand. It planned continued cost reductions, production alignment and investment in critical technologies, and expected positive cash flow in the near term. No full-year earnings or sales target was provided.
- 2009 restructuring and other charges were $22 in Q3 and $95 year to date, including a $12 pension and postretirement curtailment loss. Management estimated approximately $50 million of annualized savings from professional workforce actions and expected restructuring activities to be completed by March 2010. Further downturn could prompt additional restructuring charges that management could not yet estimate.
- The company reported a $199 million flood-related insurance claim ($116 million expense and $83 million capital), excluding a separate business-interruption claim. Through September 27, it had incurred $99 million of expense and $51 million of capital costs. Insurance coverage is being litigated; management said it remained confident of recovering a majority, but recovery is not assured.
- Product warranty liability was $953, including $247 of deferred extended-warranty revenue. Management cited elevated repair costs on certain midrange engines and earlier products and increased estimates for pre-existing warranties by $67 during the nine months.
- Other exposures include ordinary-course litigation and environmental matters, supplier commitments and guarantees. Maximum potential loss on other guarantees was $74, including $72 related to Beijing Foton; supplier termination penalties were approximately $82. The filing says the company did not currently anticipate paying those supplier penalties.
- Principal risks include persistent recession and customer credit constraints, automotive-market and supply-chain distress, emissions-compliance costs and execution, commodity and foreign-exchange volatility, pension funding, warranty and product-liability claims, and uncertain outcomes of the flood-insurance litigation. The light-duty engine agreement was not assumed by the reorganized Chrysler; Cummins identified possible impairment exposure to $171 million of assets and $41 million of commitments if alternative customers or applications are not found.
Important facts for investors to verify
- Whether market stabilization and the North American emissions-related demand increase translated into sustainable orders, and how the expected 2010 slowdown affected results.
- Whether planned restructuring savings were achieved, whether additional actions were required, and the remaining cash costs.
- Warranty claims and reserve adequacy, particularly for affected midrange engines and five-year warranty products.
- Timing and recoverability of the flood-insurance claim, including the unresolved coverage and business-interruption issues.
- Cash generation, receivables collections, access to credit facilities, pension contributions and the effect of foreign-currency-denominated cash.
- Developments in the light-duty engine program and any related impairment or customer commitments.